Where is the Bottom in AUD/USD?

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Market Drivers for May 17, 2013
Commdollars continue to get crushed
Better JPY Machine Orders help USD/JPY
Nikkei 0.67% Europe -0.34%
Oil $95/bbl
Gold $1374/oz.

Europe and Asia:
JPY Machine Orders

North America:
USD U. of Mich Confidence 9:55
USD Leading Indicators 10:00
CAD Bank of Canada CPI 8:30
CAD CPI 8:30

Its been an extremely quiet night in the currency market on the last trading session of the week with the exception of the commodity dollar which continue to be pounded on all sides by liquidation flows, The Aussie hits a fresh low today dropping to 9727 as account in Asia sold the unit mercilessly. There was no news on the pair and it appears to have been simply further unwinding of the carry trades in AUD/JPY.

The Aussie has now dropped nearly 800 points in approximately a month in a vertical line as it has become the new “obvious” trade in FX. The liquidation is driven by the assumption that the RBA will now embark on an easing cycle in order to stimulate the slowing Australian economy. However, as we pointed out yesterday the Australian economy appears to be more robust and flexible that initially thought. Furthermore, one of RBA’s stated goals for its recent rate cut was to drive down the value of the currency, but the the market having done the brunt of that work already, Australian monetary policy makers will no have less motivation to ease in the foreseeable future.

One other factor driving the Aussie lower is the slide in precious metals and that may indeed continue to be a drag on the currency especially if Gold drops through the $1300/oz. barrier. But the correlation and dependence on Gold has weakened considerably for the Australian economy and the Aussie and therefore any further downside damage is likely to be capped.
Meanwhile central bank reserve diversification traders are no doubt starting to bargain hunt at these levels and the pair could begin to stabilize as the last of the liquidation flows taper off. The Aussie is now coming into long term support at the 9700 level and could see some profit taking bounce over the next few days.

Meanwhile there are abounding signs that Abenomics in Japan is working. The latest data point to surprise to the upside is the sharp rise in Machinery Orders which climbed 14.2% versus 3.1% eyed. The news helped to prop USD/JPY back to 102.50, but as we’ve noted, the pair has stalled at that level for the past few days. There is a reported option barrier at the 103.00 strike level that may be capping the rise, but a deeper reason for the pause in the rally is the fact that US economic data has disappointed all week long.

While US economy continues to expand there are dangers that the spring swoon may turn into a summer stall. Yesterday’s disappointing results from Walmart and Nordstrom suggest that the US consumer both high and low may be growing cautious. That’s why today’s U of M data could prove key to the further direction of the pair. If the number misses it could USD/JPY back through the 102.00 level, but if it surprises to the upside it may finally trigger the move through the 103.00 figure.

Boris Schlossberg
Managing Director

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