Have CAD, AUD and NZD Hit a Bottom?

Daily FX Market Roundup 05.10.16

We are finally beginning to see some two-way action in currencies. Investors are no longer buying dollars against everything – while USD/JPY and USD/CHF continued to move higher, the dollar ended the day well off its highs against the commodity currencies. This has led many investors to wonder if the Canadian, Australian and New Zealand dollars hit a bottom because reversals are happening after extended moves and at key technical levels. USD/CAD for example broke 1.30 but failed to close above the psychologically significant level that coincides with the 50-day SMA. AUD/USD broke the 100-day SMA and a key Fib retracement but is now trading back above 0.7335 l while the decline in NZD/USD stopped right at the 100-day SMA.

There’s no doubt that the commodity currencies have fallen quickly and aggressively over the past month but the weekly and monthly charts show plenty of room to the downside. Although the bounce in commodity prices (especially oil) is likely to be short-lived, the rise in stocks and broader recovery in risk appetite could have more room to go which would encourage a further recovery in commodity currencies. However Chinese demand is still a problem, not all speculative long AUD or CAD positions have been unwound, 2-year yield spreads point to further losses and the RBA, RBNZ and BoC are all likely to be considering another rate cut. Saudi Arabia also said they will boost output ahead of state owned Aramco’s IPO which should cap gains in oil. Inventories are scheduled for release tomorrow but the impact should be limited. So while we could see a further recovery in commodity currencies, we have yet to see a bottom as all 3 remain sell on rallies. If 1.2900 is broken, we like buying USD/CAD near 1.2800, AUD/USD near 0.7450 and NZD/USD between 0.6800 and 0.6850.

The short covering in USD/JPY continued, driving the currency pair above 109.00.
The latest move was driven by fresh yen comments from Japanese officials. Finance Minister Aso reiterated that sharp forex moves are unwelcome and warned they could intervene to stabilize currencies if needed. The Post Bank said they see 108.00 as fair value for USD/JPY. While we are surprised that more Japanese officials are trying to talk up the currency at 108-109 than 106-107, this could be a strategic move to give speculators reason to cover their shorts at a time when the USD/JPY was struggling to extend its losses below 106. USD/JPY had been trying to bottom for a few days before policymakers stepped in to confirm that they don’t want to see a stronger currency. We are looking for further gains in USD/JPY but 110 could be an attractive place to sell the currency.

Weaker than expected German industrial production numbers drove the euro lower for the sixth consecutive trading day. The country’s trade and current account balances improved significantly thanks to stronger exports, but IP dropped for the second straight month at a pace that was 7 times faster than February. French IP also fell -0.3% against forecasts for a 0.7% rise. These numbers highlight the vulnerabilities in the Eurozone’s two largest economies. However for the time being the uptrend in EUR/USD remains intact as long as the currency pair remains above 1.1300.

Sterling on the other hand finally bounced after 5 days without a rally.
Yesterday’s decline stopped right at the 100-day SMA and today’s recovery was driven by better than expected trade numbers. However even with the upside surprise, the U.K. trade deficit hit its highest level in 8 years, signaling weaker first quarter GDP. The shortfall in goods alone reached the highest level on record. Of course there’s no reason for sterling traders to look as far as GDP with the Bank of England meeting and Quarterly Inflation Report scheduled for Thursday. Growth is obviously a problem in the U.K. right now but inflation had been on the rise in February and March and is likely to have moved even higher in April with oil prices rising more than 15% last month. So while the Bank of England could lower its GDP forecast, they may raise their inflation projections. If they choose to do so, it could drive sterling higher instead of lower. However if they leave their inflation projections unchanged and only cut GDP, pound will fall especially if they emphasize Brexit risks.

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