By: Kevin Sollitt
We kicked off last week’s column (All Eyes Turn To NFP: Will The Dollar Also Turn Lower In H2?) with a discussion on why the USD may have a much poorer performance in the second half of 2010 than it did in H1 & were presented with immediate evidence via poor payrolls that this may in fact be a valid theory.
The initial $ move was certainly biased this way although the trailing stop on our long cable position was triggered at 1.49. We like this tactic as it serves to lock in gains and protect against larger losses and similarly we will now lower the stop on the short NZD/NOK to entry level (4.57), currently 4.42, and objective 4.30. As suggested by findings leading up to of last week’s payrolls, a poor number reflected 652,000 jobs being shed in June-one of the most severe declines ever. The headline jobless rate provided some comfort coming in at ‘just’ 9.5%, shying away from the dreaded double-digits but still 10% when rounded and this does not include those whose benefits have just been stopped or who have been disheartened from even looking for work. The human cost of this recession is put at around 9 million jobs and even president Obama said over the weekend that this ‘hole’ may take months or even years to dig out of.
Reverting to the headline of this article, we have struggled to come to terms with the market buying USD seemingly on blind faith recently as the economy continued to flirt with the twin threats of a double-dip and wage deflation. This situation looks about to reverse.
Last week was notably the first time in recent memory that poor data combined with a decline in US stocks did not systematically trigger widespread buying of USD on the currency markets. As we have said before, Foreign Exchange markets are not that difficult to understand but they can be very tricky to navigate, it is after all mostly about timing. With that in mind, we suggest that simplistic observations such as this one can often be a good if not sometimes slightly premature barometer of activity to come.
The DXY earlier is now firmly in retreat from the psychologically important 90 level (84.6) and the next level of major support is around equally important psychological support at 80. DXY is comprised of EUR (highest at 57.6%), CAD, CHF, GBP & SEK - if sentiment turns $ negative we may see a higher than warranted move in these pairs, especially if spec positions are ultra-long DXY.
We reiterate that our view remains just bearish of neutral on the USD until such time as the market decides on the next trend but we think the tide may turn against the USD and allow the EUR to recoup some of its losses to around the 1.30 level and cable to 1.60. Preferred macro currency allocation remains short of USD against NOK, CAD, BRL & HKD & we will square shorts in NZD and AUD at market given the more positive tone developing down under. In particular we feel that the AUD may benefit significantly from four potentially positive factors:
1. The market’s willingness to sell USD on bad US data.
2. The Australian Government’s olive branch to miners, which vastly reduces the proposed super tax component on company profits.
3. The attraction and perhaps necessity for China to continue buying AUD for commodity exposure with recent official moves underway to further develop the Chinese economy by de-pegging the Yuan.
4. The RBA-one of the most dynamic and widely respected Central Banks in the world reportedly said as recently as yesterday that a rate cut would be possible if the economy warrants. AUD was sold initially on this news but we think this may actually be a net positive on the condition that global equity markets at least hold up.
Coupled with extreme levels of CHF strength and the prospect of some more smoothing by the SNB omnipresent, this week’s trade idea is to buy AUD/CHF, 50% at current market 0.8920 and 50% at 0.8810 allowing for a flush below last year’s double bottom and breakout level of 0.8875. Stop-loss 0.8650, initial objectives are 0.9360 and 0.9510, the 38.2% and 50% retracements from 1.0150.
Good luck trading.