By: Kevin Sollitt
Last week’s theme (What’s Wrong with this Picture: Poor U.S. data = $ weakness?) continued looking for a lower USD and the trend was definitely biased that way for most trading with the EUR squeezing higher by almost 200 pips in thin markets. The ECB offered a show of strength at the monthly press conference by delivering confident verbal messages that it will stick to its policies and avoid QE, only a little nervousness over structural European issues (CZK may not join EU) that crept in on Friday caused the Greenback to regain some posture as weak EUR longs were exposed and stopped-out in a typically lethargic summer afternoon session.
In the bigger picture consistent with a lower $ outlook, we note that the DXY languishes below 85 and suspect a test of the 80 region is likely in the near future evidenced by directional & continued buying of non-mainstream currencies last week such as MXN, NOK, SEK & SGD that often provide clues to the next likely general direction to be reflected by majors.
In AUD/CHF with the market currently at 0.9250 we still like the rationale & trade recommendation of long from 0.8920 and retain the profit objectives of 0.9360 & 0.9510, raising the stop-loss to 0.9020 to guarantee a minimum of 100 points on the trade. We will reload the trade at 0.8920 and 0.8810 with 0.8650 stop-loss should those opportunities arise but if one sure thing is clear in FX in 2010, it’s to make sure profits are booked occasionally.
With that in mind we wanted to share another idea this week that considers the market’s recent voracious appetite for so-called ‘risky’ currencies.
AUD, MXN & NZD all rose by a combined average of around 3.5 percent against the USD last week and although we do not dispute this trend ultimately as it’s consistent with our weaker USD view, perhaps not all of these currencies are the optimum vehicles at this particular point in time for expressing such, given the dominant underlying backdrop of pessimism combined with uncertainty evidenced by bear market rallies in equities.
Of the three currencies mentioned above, we think the Kiwi may be the weakest link in the chain and given recent comments by the RBNZ & Finance Ministry that the NZD may in fact be overvalued, the Kiwi rally seems even more questionable to us, if not bizarre and with officials desiring a weaker currency we would suggest current strength may be unsustainable. Of course we’ll need a catalyst to unwind the bullish sentiment, which may come in the form of risk-aversion and/or disappointing local data, of which this week brings a batch:
House Price Index (exp -1.4% m-o-m)
Retail Sales (exp -0.3% m-o-m and -0.2% ex-autos)
Business PMI (exp 54.5)
Food Prices (exp -0.7%) and perhaps most importantly
Q2 CPI (exp 0.4% q-o-q & 2.0% y-o-y).
NZD/USD is currently trading at 0.7085 and if we’re wrong we would expect to see the Kiwi attempt to take off and blast through the 0.7160 area that contained the unit on five days at the end of June, there is little resistance until 0.7325 behind which we’d place our stop
If the data are weak and market sentiment again shifts to a nervous disposition we expect to see the downside tested looking for an objective of 0.6565 via 0.6790.
Sterling was a sideshow last week with the BoE customarily making no comment after its ‘unchanged’ announcement but for those who like the idea of the weaker Kiwi trade, consider that Sterling could buy almost 2.62 NZD this time last year, currently the rate sits at 2.12 having hit 2.0355 in May 2010.
Although it seems a reach, our medium term view is for both a decline in the NZD and an increase in the value of GBP as confidence declines & returns, respectively-our objective is a simplistic but achievable 50% retrace target of the drop from 2.6175 to 2.0355 back up to 2.3265-food for thought.