Why is AUD/USD So Weak?

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Market Drivers Jan. 28, 2012
Yen crosses hit profit taking as liquidity thin
Japan sets growth target at 2.5%
Nikkei -0.94% Europe 0.08%
Oil $95.50/bbl
Gold $1657/oz.

Europe and Asia:
JPY CSPI -0.4% vs. -0.5%

North America:
USD Durable Goods Orders 8:30
USD Pending Home Sales 10:00

It’s been a very listless night of trade in the currency market with virtually no economic data on the calendar and the close of Australian markets contributing to the low liquidity consolidation session. In Asian session trade both USD/JPY and EUR/JPY initially opened higher setting nominal new yearly highs in early New Zealand trade, but the enthusiasm quickly faded and the pairs quickly turned lower as buyers rushed to book profits.

In the Japan the opening of Parliament generated a slew of fresh rhetoric from key Japanese officials including PM Abe who again reiterated that he wants the BOJ to achieve its 2% inflation target as soon as possible. The Japanese government also issued its growth forecast for 2013 that could give the government some leeway in compiling a budget for the upcoming fiscal year in April. The report estimates Japan will post 1% real growth in the fiscal year ending in March and 2.5% growth in the following fiscal year of 2013. These projections will be used to gauge tax revenue for a budget slated to be approved this week.

The 2.5% forecast may be considered too optimistic by many market observers as it is still not clear if the recent weakening of the yen will have the desired impact on growth that Mr. Abe seeks. Some analysts have pointed out that demand may slump in the face of increase in sales tax which could offset some of the export benefits of lower yen.

USD/JPY continued to trade lower in early European trade with the pair circling around the key 90.50 level as sellers remained in charge. After such massive run up last week that saw the pair gain 3 big figures, this week’s corrective action is natural. But with momentum still very much in USD/JPY’s favor the pair could resume its uptrend in North American session if the Durable Goods and Pending home sales data surprises to the upside pushing US yields higher which could help USD/JPY retake the 91.00 handle.

Meanwhile the euro continued its rally against the comm dollars as AUD/USD slid below the 1.0400 figure while EUR/AUD rose to a fresh half year high of 1.2950. Part of the reason for the rally is the massive unwind of the Aussie “safe harbor” trade, as the risk of EZ fracture has now passed investors are repatriating funds back into euros on hopes of an economic recovery in the region.

On the other hand, the Aussie is not longer the beneficiary of the risk trade as the currency’s correlation with global equities declined markedly. Although stock prices have performed well in January the Aussie has lagged badly as investors reassess the country’s prospects amidst lower capital expenditures on new mining projects and its still high exchange rates which weigh on Australia’s competitiveness.

Recent data from Down Under has been disappointing and tomorrow’s LEI report may confirm a further slowdown in activity which pressure the unit lower towards the 1.0350 level as speculators continue to dump their long AUD/USD positions.

Boris Schlossberg
Managing Director

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