USD under pressure, AUD resilient

Risk assets registered further gains in the wake of speculation that Spain is close to requesting aid and stronger than forecast US Q3 earnings and economic data. US earnings have beaten expectations at 73% of the 48 companies reporting while US industrial production rose by a bigger than expected 0.4%. Meanwhile German resistance to a full Spanish aid appears to be crumbling as the door opens wider to a formal Spanish request for a credit line.

Additionally German data was a big more encouraging as the German ZEW investor confidence survey recorded its second straight monthly gain. Aside from rallying global stock markets the Baltic Dry Index continued its ascent and even gold prices showed some stability around the $1750 level. There is little to distract from the more positive market tone today, with US earnings and the EU Council meeting in focus.

The USD has come under renewed pressure as risk appetite improves. Firmer US data has contributed to improving risk appetite which in turn would usually be expected to weigh on the USD. However, better data may also act to lessen expectations of the magnitude of Fed QE, which should play positive for the USD. This is the theory but in practice the USD relationship with risk aversion has slipped while a lot of QE expectations were already built into the currency.

I don’t see the pressure on the USD intensifying much further. Conversely the EUR remains very well supported as hopes grow of a Spanish request for bailout funds. I believe expectations of concrete action at the EU Summit beginning tomorrow are overdone, with significant decisions on Spain and Greece only likely in November. EUR/USD will struggle to break above resistance at 1.3180.

AUD bears failed to garner support yesterday as the currency easily overcame a blip lower in the wake of the RBA minutes yesterday. While sounding dovish there was little new in the minutes, with no fresh information on future policy actions. In any case markets have already priced in further easing at the 6 November RBA meeting suggesting little further risk to the AUD. Following its failure to build on any downside momentum AUD/USD looks set for a test of resistance around 1.0404, consistent with the upside signal from my quantitative model.

One impediment to AUD gains is the fact that speculative market positioning remains long. However, positioning is now much lower than its three-month average and well off its recent highs suggesting that there is less likelihood of a further bout of profit taking or position squaring. Reduced long positioning will allow the AUD to recoup some lost ground.

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