USD pulls to new recent high ahead of this evening's FOMC meeting. AUD falls further as RBA prepares market for coming cuts. | ||||||||||||||||||||
| USDCAD also finally smashing through huge range resistance and trading above 1.0400 as oil continues to fall - may be set for higher levels still | ||||||||||||||||||||
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| THEMES TO WATCH – UPCOMING SESSION Key Risk Events (All times in GMT) * Germany Jul. Final PMI Services (0755) | ||||||||||||||||||||
Market Comments The commodity currencies are experiencing further damage after yesterday Deutsche Bank's analysts decided to call a top to the commodity market and the RBA beginning softening up the market for future interest rate cuts. The RBA left rates unchanged as widely expected and noted its' rationale for raising rates and the still high inflation levels. But it also dropped a couple of key phrases: such as saying that it saw "increasing scope to move to less restrictive policy". Also, the RBA noted that it saw growing signs of softness in the economy and is making the assumption that inflation will slow to 3% in 2010. All in all, you have the stuff for a 50 bp rate cut as soon as the next meeting if commodities continue to come off as rapidly as they have recently, perhaps only 25 bps or even no cut until further out if we see the deceleration in the Australia economy slow and if commodities make a sharp turn northward again. The odds are beginning to lean to the former scenario. Looking at the interest rate differentials in the 2-year interest rates between the US and Australia, we note that the spread has fallen from as high as 510 basis points in late February to about 360 basis points overnight. The last time this spread was this low was late 2007, when the pair was trading in the 0.8600-0.8800 range. AUDUSD is fast approaching its 200-day moving average in the 0.9200 area. It has not closed below this average since almost precisely a year ago, when the carry trade panic took AUDUSD below this average for a mere 5 days. Before that we have to go all the way back to late 2006 to find the pair trading below this average - that's how persistent the up trend has been in this pair. USDCAD too finally broke higher through the top side of its 8-month range as the commodities sell-off theme saw oil ratcheting quickly lower on USD strength yesterday. The pair accelerated once the 1.0325 level gave way yesterday as all manner of options and break-out relate orders were likely triggered by this event. The market has been caught sleeping on that pair. The next big target to the upside comes in the 1.0880-1.0930 area. Yesterday saw a bit of a scare on the near-forgotten geopolitical risk front as Iran continues to scuffle with the rest of the world over its nuclear ambitions. With the Olympics on the way this weekend and the next 2+ weeks, we are likely entering a bit of a quiet period on the international diplomatic front, but this is a festering issue that could rear its ugly head again at any time in coming months and cause significant disruption, depending on the scenario. Keep it on your radar and perhaps protect your portfolio with an option - say EURCHF puts, for example. This evening's FOMC may be one of the least interesting meetings we have seen in a while. The Fed will certainly keep rates unchanged and is likely to toss out a few warning words on inflation. Meanwhile, its view of the economy and the fragility of the banking system is likely dour enough to rein in any rhetoric that might suggest that they are about to hike interest rates any time soon. After all, it's only a week since the major Fannie/Freddie rescue operation was announced. The Fed are likely enormously relieved that the USD has recovered from the brink once again and that key commodity prices are tumbling - this will help seal the deal for a continuation of the "no change and lets wait for the next financial crisis and see what we can do about that" policy. The market has removed about 50 bps of tightening from its forward projections of Fed rates in recent weeks, and that trend of pricing out Fed tightening may continue after today's FOMC meeting. Yet this is not necessarily USD bearish if the forward projections for other central banks come off even more rapidly, which is what we're seeing to a slight extent for the ECB and to a very pronounced extent with the RBA as noted above. Let's see how the USD behaves if 1.5500 is cracked in EURUSD after the FOMC as this sets up a possible try at the bottom of the range below 1.5300 and even a test of the 200-day moving average just above 1.5200. As a "broken record" side note, with global rates and commodity prices coming down, the JPY and CHF should be flourishing more than they have thus far. Go low yielders! Chart: USDCAD | ||||||||||||||||||||
| FX USDJPY upside on ISM-Nonmanufacturing and FOMC meeting tonight... | ||||||||||||||||||||
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Risk warning Finexo shall not be responsible for any loss arising from any investment based on any recommendation, forecast or other information herein contained.The contents of this publication should not be construed as an express or implied promise, guarantee or implication by Finexo that clients will profit from the strategies herein or that losses in connection therewith can or will be limited. Trades in accordance with the recommendations in an analysis especially leveraged investments such as foreign exchange trading and investment in derivatives, can be very speculative and may result in losses as well as profits, in particular if the conditions mentioned in the analysis do not occur as anticipated. |
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