Forex

Hawkish RBA and Apple earnings send dollar lower

Contributed by AC markets

As anticipated, the RBA Minutes overnight were incredibly hawkish; highlighting further evidence of both global and domestic economic recovery, and signalling that more tightening was likely to come. More good news for AUD bulls was the RBA’s assessment of the currency at these levels; despite reaching a 14-month high vs. the USD, the RBA seemed unconcerned by the currency’s strength, concluding “The appreciation of the Australian dollar in recent months had reflected the generally improving sentiment in financial markets, the relative outperformance of the Australian economy and the strength of commodity prices.”.   With the USD taking a pummelling with every uptick in risk sentiment, and good news streaming in daily from corporate earnings - the latest talisman being Apple Inc – there seems little barrier either fundamentally or technically to stop the USD weakening to fresh lows. As EURUSD creeps ever closer to the psychologically important 1.5000 level (1.4970 at the time of writing), the next source of good supply doesn’t come into play until 1.5350. Indeed the scope for carry trades has been clearly left on the table, as the NY Fed yesterday clarified that its testing of tools for withdrawing monetary stimulus were nothing more than prudent trials. The release stated that “no inference should be drawn about the timing of monetary policy tightening”, disappointing USD bulls who might have seen this as a step towards US removal of accommodative conditions. Even the threat of verbal intervention has lost its venom in the past few weeks as rhetoric from both sides of the Atlantic has failed to materialize into tangible support for the USD.   Over 40 companies are reporting earnings out of the US today, including Coca Cola, Pfizer, State Street, Black Rock, UAL, Yahoo, and Northern Trust; but despite it being a very mixed bag of sectors, one really has to question whether a disappointing result is going to be enough to stem the declines in the USD from here. It seems we would have to be looking at a serious spate of bad earning from the remainder of corporates, or the potential collapse of another financial firm to rattle investor confidence at this stage. Until we see a convincing break or reversal, as they say, the trend is your friend – which means we continue to sell the USD on rallies.

Today's Key Issues (time in GMT):

09:00 EUR Construction Output, % m/m (y/y wda) Aug prev: -2.0 (-10.8)
12:30 USD Housing starts, thous Sep exp: 610 prev: 598
12:30 USD Building permits, thous Sep exp: 595 prev: 579
12:30 USD PPI, % m/m (y/y) Sep exp: 0.0 (-4.3) prev: 1.7 (-4.3)
12:30 USD Core PPI, % m/m (y/y) Sep exp: 0.1 (2.0) prev: 0.2 (2.3)
12:30 CAD Wholesale Sales, % m/m Aug exp: -0.4 prev: 2.8
12:30 CAD Leading Indicators, % m/m Sep exp: 0.8 prev: 1.1
13:00 CAD BoC Rate Announcement, % exp: 0.25 prev: 0.25

The Risk Today:

EurUsd Another 24 hours of consolidation between 1.4840 and 1.4967 with the added excitement of some shorts getting stopped this morning, sending the pair on a brief visit to the psychological barrier of 1.50 (1.49945 high). Now trading back below 1.4967 at time of writing, the market waits patiently for a raft of corporate earnings out today, with 5 out of the Dow 30 all reporting before the US market open (Caterpillar, Du Pont, Coca-Cola, Pfizer and United Technologies) plus Lockheed Martin, Peabody and tens of others. The point here is that with so many non-financial names releasing numbers we should gain a better idea of the real state of the economy / recovery and expect this to translate directly into risk appetite or lack of it. Large trades in EUR USD prior to these numbers is unlikely so more to come this afternoon.

GbpUsd 1.6221 support level held well yesterday (1.6241 the low), and the pair bounced strongly to again test 1.6468 resistance. A break above 1.6468 should pave the way for a move to 1.6570, whilst a break below through 1.6221 will bring fresh selling down to 1.6127 and 1.6038 thereafter.

UsdJpy Some rather intricate intraday trading to be had on USD JPY today with a 48 hour downtrend in play which could attract shorting at 90.60 with stops at 90.90, followed by the 2 week uptrend players getting long down at 89.70 with stops at 89.40. Very simple trading with very simple risk management.

UsdChf Downtrend is still intact and after failing to remain above 1.0123 (support now turned resistance), parity now seems ever more certain. Expect fresh selling at 1.0186, as only a clear move above that 1.0250 resistance can be viewed as bullish for the pair.