Has AUD/USD Made a Short Term Bottom?

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Market Drivers Jan. 29, 2013
AU business confidence improves at best rates in 10 years
German Consumer confidence improves
Nikkei .39% Europe -0.20%
Oil $96.50/bbl
Gold $1662/oz.

Europe and Asia:
AUD Conference Board Leading Index -0.2% vs. 0.2%
AUD NAB Business Confidence 3 vs. -9
EUR German GfK Consumer Confidence Survey 5.8 vs. 5.8

North America:
USD Consumer Confidence 10:00

An extraordinarily quiet night of dealing in the FX market with EUR/USD marking out a very narrow range as the pair hung to either side of the 1.3450 level for most of the morning trade. In economic news German GFK consumer confidence printed at 5.8 versus 5.7 the month prior continuing the trend of improving sentiment surveys in Eurozone’s largest economy. Although Germany saw a slowdown in economic activity in Q4 of last year, consumers are optimistic about a rebound. According to GFK, “consumers are expecting a gradual revival in the economy over the course of this year thanks to the present calm situation on the financial markets.”

Steady labor conditions have helped cushion consumer sentiment with the economic expectations component of the index rose to -11.3 points in January, after falling to -17.9 points one month earlier. Consumers’ willingness to buy in January rose to 35.3 points from 20.1 in December while income expectations also rose in January to 36 points from 21.2 in December – its highest level in six months.

The news from GFK suggests that Germany remains the engine of growth in the EZ and the improvement in consumer sentiment should help drive domestic demand in H1 of this year. The euro however saw little reaction to the news, as earlier it sold off slightly on corrective flows from EUR/AUD sales.

In contrast to the euro the Aussie put in a very solid performance in Asian and early European trade as the unit rebounded above the 1.0450 level after a week of relentless selling. The rally was driven by sharp recovery in the NAB business sentiment indicator which rose to 3 from a reading if -9 the month prior. This was the best rate of change improvement in more than a decade and lifted some of the gloom surrounding the currency.

The uptick in sentiment was driven primarily by the last minute deal on the US “fiscal cliff” issue which provided a modicum of relief to Australian firms and global capital markets. Business conditions however remain poor according to NAB. Weakness in forward indicators of demand continues with poor forward orders; capacity utilisation and capex at depressed levels; and credit demand back to record low levels.

NAB concluded that overall, the survey implies underlying demand and GDP growth in the March quarter of around 2¼% and 2¾% respectively – a further slowing in growth from already below trend rates. Nevertheless, the news was taken with relief by the market which was looking for any signs of improvement or stabilization in the Australian economy. Still, it is unclear if today’s price action marked any type of meaningful short term bottom in the Aussie or whether today’s move was a classic reflex short covering rally. For now the 1.0400 level appears to hold, but the pair must clear the resistance at 1.0450 to make a convincing case that selling is done.

In North America today the calendar is light with only Consumer confidence on the docket. Market expectations are for a small drop to 64.8 from 65.1 the month earlier. If the data surprises to the upside it could provide further lift to risk currencies and perhaps send EUR/USD through the key 1.3480 resistance level. For now however it remains very much in no man’s land and a failure to break to the upside yet again could embolden the shorts to target the 1.3400 level as the day proceeds.

Boris Schlossberg
Managing Director

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