Can Aussie Find a Bottom?

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Market Drivers for September 22 2014

NZD PM Key reelected

Roubini Research forecasts 7500 on AUDUSD

Nikkei -0.71% Europe -0.45%

Oil $91/bbl

Gold $1215/oz.

Europe and Asia:

NZD Westpac Sentiment 116.7 vs. vs.121.2

North America:

USD Existing Home Sales 10:00

It’s been a quiet night of trade on the first trading session of the week with most of the majors tracing our relatively narrow ranges in the absences of any economic news, but both the Aussie and the kiwi saw some serious volatility throughout Asian and early European dealing.

In New Zealand Prime Minister John Key was elected to his third term in office with his National party winning the biggest share of the vote since proportional representation was introduced in 1996. The internet entrepreneur’s Kim Dotcom’s party which some analysts thought could pose a destabilizing threat failed to win any seats.

The kiwi popped on the open of Asian trade rising to a high of 8171, but the euphoria soon faded as the selling of the Aussie dollar soon spilled over across the Tasman sea. The Australian dollar came under renewed selling pressure after reports in Australian press stated that Roubini economics was calling for the pair to fall all the way to 7500 cents by 2015.

Roubini Economics senior director of research, David Nowakowski made a case for lower Aussie by stating that the firm expected Australian GDP to dip to 2% next year thus allowing RBA to lower rates once again and trigger a second wave of selling that would take the pair down to the 7500 level.

Mr. Nowakaowski’s thesis rests on the assumption that commodity prices will continue to decline and certainly a sharp falloff in demand from China could prove his assumption to be true. However while Chinese growth has moderated it has shown no signs of contraction. In addition Australian economy has shown surprising resilience and ability to rebalance away from pure mining growth to more services oriented output. Still Chinese data will be key and tonight’s PMI Manufacturing report will be keenly watched by the market for any serious signs of a slowdown.

The Aussie is now fast approaching the key support level of 8850 which was the low earlier this year and the pair may find a modicum of support at that level but sentiment against the pair remains extremely negative for now and it continues to be a “sell on rallies” trade both a a result of capital flows towards the greenback and the persistent worries over Chinese economic slowdown. However given the massive amount of selling that it has absorbed over the past month the AUD/USD is now primed for a short covering squeeze sooner rather than later.

In North America the calendar is quiet today with only the Existing Home Sales on the docket at 1400 GMT. The market is looking for a slight rise which could provide a lift for USD/JPY which continues to consolidate around the 109.00 level. This week the US calendar is relatively barren with only Durable Goods and final Q2 GDP readings so the pair may see some back and forth movement with some possible profit taking sending to a test of the 108.50 support.

Boris Schlossberg
Managing Director

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