More Profit Taking Ahead for USD/JPY and EUR/USD?

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Market Drivers for Feb. 6, 2013
Aussie hammered as Retail Sales misses
German Factory Orders 0.8% as expected
Nikkei 3.77% Europe -0.27%
Oil $96./bbl
Gold $1671/oz.

Europe and Asia:
AUD Retail Sales -0.2% vs. 0.3% eyed
EUR German Factory Orders 0.8% vs. 0.8%

North America:

Its been a quiet lackluster night of trade in FX market today with both EUR/USD and USD/JPY contained to relatively tight ranges, but Aussie hitting fresh yearly lows in the wake of very disappointing Retail Sales data.

Australian Retail sales missed their mark, dropping unexpectedly in the month of December sending AUD/USD to fresh monthly lows as investors dumped the currency in Asian and early European trade. Retail Sales declined by -0.2% versus forecasts of 0.5% gain shocking markets as consumption hit a two and half year low.

Spending on other retailing, a category that includes pharmaceutical goods and book retailing, dropped 2.8%, and consumers spent 1.1% less at cafes and restaurants. Spending did increase by 2.1% on clothing and footwear, and 0.8% at department stores.

This was the third month in a row of contracting Retail Sales – the worst such stretch of declines in 13 years – indicating that the Australian economy is clearly slowing as the effects of the mining boom begin to wear off. Today’s weak data also helps to explain yesterday’s rather dovish RBA statement which minimized inflationary pressures in the system and suggested that further rate cuts may be in the offing.

The news hit the Aussie hard, as the single currency broke through the key 1.0350 support level and remained near the day’s lows at the start of European dealing. With market consensus now becoming more and more convinced that Australian cash rates will continue to be lower, the Aussie will remain under pressure. The pair could break below the 1.0300 level as the day proceeds and may not find support until the 1.0250 level as investors adjust their expectations regarding the Australian economy.

Meanwhile in Japan the Nikkei soared by 3.77% in a delayed reaction to the departure of the BOJ chief Masaaki Shirakawa who was viewed as an obstacle to the adoption of the aggressive monetary policy that Prime Minister Abe wishes to implement. USD/JPY was able to just break through the 94.00 barrier in midday Asian trade but failed to hold that level as European session progressed. Although USD/JPY’s recent rise has been nothing short of spectacular, the pair may now find forward progress to be a much greater challenge. Investor enthusiasm about Mr. Abe’s proposals may have run ahead of itself and USD/JPY now faces much more formidable resistance near the 95.00 level. Therefore, some pause may be due with USD/JPY sliding towards the 93.00 mark on any fresh excuse for profit taking.

In Europe the calendar is nearly barren with only the German Factory orders on the docket. The number printed as expected at 0.8% rebounding from prior month’s contraction of -1.8%. Export orders rose by 2.4% but domestic orders fell by -1.2% suggesting that demand in Eurozone’s largest economy remains fragile.

The EUR/USD saw little reaction to the news as it continues to trace out a narrow range of 1.3520-1.3550 in late morning European trade. The pair continues to consolidate its recent gains but looks vulnerable to another test of the 1.3500 barrier especially if profit taking takes hold in the North American session which also holds very little economic data today.

Boris Schlossberg
Managing Director

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