AUD supported but be wary of profit taking

AUD/USD broke above its 200 day moving average (0.9137) encouraged by upbeat comments about economic growth prospects from Reserve Bank of Australia Governor Stevens. The fact that AUD remains supported despite higher risk aversion overnight is encouraging.

A run of better than expected data including Q4 GDP, retail sales, trade and jobs report have underpinned the currency. Additionally bad news is good in the case of the China impact on AUD as weaker data has led to growing expectations of a stimulus package to boost China’s economy.

Against the background of some improvement in risk appetite, and low volatility, the AUD looks like an attractive bet. My view has been consistently constructive on the AUD over past months and I remain of the view that there are further gains in store although in the near term profit taking is expect to emerge around resistance at AUD/USD 0.9342.

AUD the “Teflon” currency

Despite further concerns about Chinese growth, following the release of the much worse than expected trade data over the weekend, AUD continues to hold gains above 0.90. Additionally declines in key commodities such as iron ore have done little to dent the enthusiasm for AUD. In this respect, AUD is fast becoming the new “Teflon” currency, helped by the neutral stance of the Reserve Bank of Australia and recently positive domestic data such as building approvals, Q4 GDP and January trade data.

The next major test for AUD will be Thursday’s release of the February jobs report. Clearly there has been a worsening in jobs conditions but the worst is likely over and after a decline in employment over the last couple of months some rebound is expected (our forecast +20k, consensus +15k).

AUD is set to consolidate over the near term, with technical support seen around 0.8980.

No surprises from RBA

AUD was restrained ahead of the RBA meeting overnight but the unchanged policy decision and accompanying statement are set to leave the currency unperturbed. As reflected in the uptick in the February TD Securities inflation reading yesterday to 2.7% YoY the central bank has limited room for easier policy despite weaker job market conditions. Moreover, the RBA appears to be less concerned about the level of the AUD, and despite noting that the AUD remains high by historical standards there was no comment today about expecting further declines in the currency. Overall the statement was similar to last month.

AUD has held up well even in the face of weaker Chinese data and will face little damage from today’s RBA outcome, with strong support around AUD/USD 0.8821 and resistance around 0.8990.

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AUD hit by weak jobs data

AUD has been one of the best performing major currencies so far in February. Better than expected Chinese trade data released yesterday was a boon for the AUD given Australia’s strong trade links with China. Moreover, as markets have backed away from RBA policy easing expectations AUD has gained a sound footing.

Positive sentiment for the AUD was dashed today however, following the release of January jobs data which came in worse than expected at -3.7k versus +15k consensus. The details were weak too, with the unemployment rate rising to a 10 year high of 6% and participation rate dropping to 64.5%.

The data will clearly restrain AUD in the short term, but is unlikely to spark renewed risks of further policy easing given a rise in inflation pressures. In this respect, AUD is set to continue to show some resilience over coming weeks. Near term AUD/USD support is seen around 0.8915.

AUDjobs

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RBA statement bullish for AUD

AUDIMM

AUD has held up relatively well considering the pressure on risk currencies in general. The fact that speculative positioning in AUD has already fallen to extreme levels suggests 1) scope for further downside is limited and 2) AUD could bounce strongly in the event of good news.

In the event, the RBA unsurprisingly left policy rates unchanged but focussed attention on the recent rise in inflation. The RBA highlighted in its accompanying statement that inflation has been higher than forecast. Moreover, the RBA does not appear to be actively talking the AUD down but highlighting the benefits of past AUD weakness if sustained.

Overall, the statement is bullish for the AUD especially as it appears to confirm that the policy easing cycle is over. Consequently the bounce in AUD following the rate decision is likely to be strong.

AUD/USD technical support is seen around 0.8660, with resistance at 0.8889.

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A further blow to risk appetite

Amid a market that is already very nervous the much weaker than expected US ISM manufacturing confidence index (51.3 versus 56.0 consensus) taken together with the weaker Chinese non manufacturing purchasing managers index (53.4 versus 54.6 prior) dealt another blow to risk appetite.

Consequently the VIX fear gauge has spiked to its highest level since the end of 2012 and our risk barometer has moved swiftly into risk hating territory. US Treasury yields have continued to drop, with the 10 year yield having slid by around 45 basis points so far this year.

Suffice to say investors should steer clear of risk assets over the short term as the turmoil does not look like it will be over anytime soon. A combination of tapering, a confluence of country specific emerging market country concerns and weaker growth in China provide the backdrop for a volatile few weeks if not longer, ahead.

The main event today is the Reserve Bank of Australia meeting where we look for no change in policy. However, the key events of the week are yet to come, with the European Central Bank and Bank of England policy decisions and US January jobs report all on tap over coming days. In brief, no change in policy is expected from either central bank and payrolls are expected to come in around 200k.

EUR to drift lower, AUD supported, JPY flatlines

EUR/USD has failed to retake the 1.2400 handle and as noted yesterday looks set to gradually make its way lower again. News that the German government lent its support to the European Central Bank (ECB) bond buying plan helped to limit losses overnight, but there is likely to be little news on the policy front over coming weeks as Europe moves into full blown summer holiday mode.

No news is perhaps good news, but market patience continues to run thin and the EUR will eventually be punished should policy makers fail to deliver which has been so often the case. With only German factory orders in terms of data releases of note today, EUR/USD is set to settle into a range, but with a downside bias.

The RBA meeting today is likely to prove relatively uneventful. Almost all analysts polled expect a no change outcome from the Reserve Bank. As this is the largely priced in, the main influence on AUD will be the accompanying statement. The market is overly aggressive in pricing in 75 basis points of policy rate cuts over the coming months and in this respect it will require a particularly dovish statement to validate these expectations.

More likely, the RBA will sound neutral reflecting on relatively firm data (except the June jobs report) releases since the last meeting and a better global environment. Combined with strong attraction to ‘carry’ trades and a firmer tone to risk appetite, AUD looks well supported, with technical support seen around 1.0437.

USD/JPY continues to flat line just above the 78.00 level ahead of this week’s Bank of Japan meeting. There is unlikely to be much excitement from the BoJ meeting but the pressure to take more aggressive steps to reach their 1% inflation goal as well as to weaken the JPY remains strong. The 78.00 level appears to be an uncomfortable equilibrium for markets and Japanese policymakers.

Although low implied FX volatility suggests that there is little expectation of a move in either direction Japanese officials continue to remain concerned about the strength of the JPY. Similarly, the US Treasury bond versus Japanese JGB yield differential (2 year) remains relatively steady, suggesting little directional impetus in the short term. Given hopes / expectations of more Fed quantitative easing it seems unlikely that USD/JPY will make much traction on the upside over coming weeks.

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