IG Markets forex thoughts

IG Markets forex thoughts

AUD/USD

AUD/USD continues to find good buying support in the low 1.02 levels, as traders continue to play the range it has been set for the last 22 days. The pair printed a low of 1.0240 in US trade, but failed to close below the April 24 pivot low of 1.0247, suggesting the AUD bulls don’t want to see a move to parity just yet. The event risks remain very real for the pair, although we still feel the huge demand for Australian bonds (which invariably means buying AUD) from offshore investors and the potential upside expected to be seen in the Chinese equity market should support AUD/USD going forward and will keep the Aussie above parity. We did see a slight uptick in AUD/USD on the back of the statement on monetary policy, and there was modest pairing back of expectations of a June cut, with the OIS market now suggesting a 56% chance of a cut as opposed to 66% prior to the statement; the market’s longer-term assumption of 76 basis points to be cut over 12 months still remains. The Australian ten-year bond was a touch higher, with yields moving up two basis points to 3.57%, so it seems the statement was not as dovish as some had expected, or perhaps it was some squaring of positions ahead of Friday lunch! However, as expected the RBA cut its assumptions of 2012/2013 growth, both domestically and globally, while also lowering its inflation forecasts and looking at page three of the statement to the paragraph highlighting that ‘in terms of risks on the domestic front, there is the possibility that in the near term, labour shedding across a range of industries outside of the mining sector accelerates as firms continue to adjust to the high exchange rate, weakness in the property market and effects of weaker public demand’. Whilst the revisions are probably in more in line with reality, there are clear downside risk and you get the sense that the RBA will keep the door open on further easing. Clearly the upcoming employment and GDP report could hold the key on whether the rates market has got ahead of itself, and justify another three cuts over the next twelve months. The upcoming non farms remains key, and although a good/bad result will perhaps be easily seen in the price action in USD/JPY and EUR/USD, the fortunes of AUD/USD is less certain. Clearly a good number is positive for the USD, given it lowers QE3 expectations, however it is also good for the AUD because it is still the poster child for risk. Stick to the crosses to be sure, and AUD/JPY is the preferred trade on a firm number. Keep an eye on AUD/CAD, which is trading below its multi-year uptrend drawn from the 2008 low at 1.0181 on the weekly chart. A close below here tonight would suggest the bulls have given up, and a counter-trend may develop and would be our ‘trade du jour’.

EUR/USD

EUR/USD traded in a range of 1.3095 to 1.3180 yesterday, however it ultimately settled six points lower on the session. Again the underlying support for the pair below 1.31 was clearly evident, and we feel this should hold in the short term, although a number north of 200,000 in tonight’s US payrolls lottery could take some belief out of the QE3 trade, thus strengthening the USD, and subsequently pushing EUR/USD back below 1.31. On the other side of the coin, a terrible jobs print should see good buying in the pair, although the upside should be capped at 1.3272, which represents the downtrend drawn from the February 29 high. The investment banks are reporting offers above 1.32 and stop losses from 1.3250 to 1.33. Clearly the rhetoric from ECB president Mario Draghi disappointed traders who were hoping he would acknowledge the weakness in manufacturing and other data points and indicate easing at a future meeting, although he did leave the door open for cuts if its growth outlook proves too optimistic. Mr Draghi stressed the impact of the LTRO (long-term refinancing operation) is not fading away, suggesting we will not see a third round of liquidity injections anytime soon, while also saying that the ECB ‘did not discuss any specific move in interest rates’. It appears the ECB’s baseline scenario has not changed, and it continues to foresee a ‘gradual recovery in the course of the year’, while the Central Bank still feels that monetary remains accommodative; given the uptick in EUR/USD, it seems the market was positioned for more dovish narrative. The upcoming non-farm jobs report is the key highlight in the US session, and while consensus is calling for an improvement from the March print, with 160,000 jobs created, the analysts' opinions are ranging from 89,000 to 210,000. Given the ADP payrolls report, uptick in the initial claims and lower pace of hiring seen in the ISM services manufacturing report, expectations are low, so it appears the market is probably positioned for a number just north of 100,000. It is fair to say we will see a pretty subdued trade going into the report, however even when we do see the payrolls report, traders then need to position themselves for the weekend drama, with the Greek elections the major event risk. Polls suggest the current coalition (Pasok and the New Democracy party) may have a tough time getting the required votes to keep the austerity regime going, so any uncertainty caused by a failure to achieve majority will certainly cause risk to be paired back on Monday.

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