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Stong & Weak: Australian Dollar Weakness in Focus
Talking Points:
When comparing a currencies general trend against their 200 Simple Moving Average, this past week has seen the Australian Dollar drop two rankings. This drop represents a tie for the largest in the week (tied with the US Dollar).
Based on structural weakness seen in the Aussie and a rejection of the AUDUSD pair at the significant .95 price level, we think Australian Dollar weakness will return to the market.
There are a couple of news events that could spark a large move in the Australian Dollar.
First of all, US lawmakers are debating spending bills that if left undecided, could lead to a partial government shutdown of services. Then, US lawmakers have to additionally negotiate the debt ceiling on the US spending. This leads to uncertainty because more heat is being placed on the US economy to slow down the spending. This could impact other main world markets in Europe and Asia due to the size of the US economy.
Australia fits into this equation because they have strong ties with the Chinese economy. China is the biggest export destination of Australian goods. China is the largest importer into Australia. If the US economy reduces their spending, then China has less foreign demand for their products which affects their pull into Australia.
Secondly, Australia’s central bank, the Reserve Bank of Australia, releases their announcement on target interest rates Tuesday at 04:30 GMT. The RBA has been in a rate cutting mode for nearly 2 years now due in part to China’s slowing economy. Though the recent Fed ‘no taper’ announcement may lift emerging markets like China, the no taper signal indicates weakness still persists and that inflationary pressure may be tamed in US and China. Weak Chinese inflation means downward pressure on Australia inflation and rates.
Notice in the chart above how inflation has remained muted in both China and Australia even on the heels of the Fed’s QE3 announcement from September 2012. All of that money printing didn’t improve much of the worldwide spirits and spending. Therefore, look for the positive effects of ‘no taper’ to wear off which could hurt the value of the Australian Dollar.
Executing the Trade
Last week, we highlighted Euro strength and purchased Euro’s through a basket of currencies. The position was slightly underwater but never hit the stop loss of 1.5%. We will keep that Euro buy currency basket trade open.
This week, we’ll add a short AUD currency basket trade. The stop loss will be 1.5% of the account balance and we’ll take profit at 3.0% for a 1:2 risk-to-reward ratio.
U.S. stocks drop as fiscal impasse frays nerves; Dow down 0.46%
U.S. stocks fell on Friday as a congressional deadline to pass a spending package and avoid a government shutdown grew closer with little compromise in sight by the closing bell.
At the close of U.S. trading, the Dow Jones Industrial Average finished down 0.46%, the S&P 500 index fell 0.41%, while the Nasdaq Composite index slid 0.15%.
Congress must approve a spending package by Oct. 1 or risk partial government shutdown afterwards.
While markets are expecting a last-minute deal, uncertainty steered investors away from the U.S. stocks on Friday.
The Democratically-controlled Senate earlier Friday approved a stop-gap spending bill to fund the government through Nov. 15.
The bill was stripped of language defunding President Barack Obama's healthcare reform law, though the legislation will go back to the Republican-controlled House of Representatives, which called for defunding the president's healthcare law in the first place.
On Friday afternoon, President Obama urged Congress to come to an agreement and prevent a shutdown.
Mixed data sent stocks falling as well.
Elsewhere, the Thomson Reuters/University of Michigan consumer sentiment index fell to 77.5 in September from a reading of 76.8 the previous month.
Analysts were expecting the index to rise to 78.0 this month.
Week Ahead: Stock Markets Enter Choppy, Uncharted Waters
If no deal is reached to fund the Government by midnight on Monday, many stock investors may be tempted to take profits in the short term and who can blame them? Then again, if a last-minute deal is done, equities may even get a boost this week.
Government Shutdown Could Disrupt Twitter's IPO Timeline
The threat of a looming government shutdown has already sent stocks tumbling. Could it also trip up Twitter’s IPO? The social media company wants to list its shares within a few months, according to reports, but a government shutdown would include the SEC and might interfere with those plans.
Twitter announced on September 12th that it had confidentially filed a prospectus (Form S-1) for an initial public offering. However, this was not the real beginning of the process: the company had filed the paperwork two months earlier, and was only making the announcement to get ahead of press leaks. News site Quartz reports Twitter planned to make its confidential filing public this week, with a goal of trading its shares sometime before Thanksgiving.
2013-10-01 04:30 GMT (or 06:30 MQ MT5 time| [AUD - Cash Rate]
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RBA Maintains Cash Rate At Record-Low
The Reserve Bank of Australia on Tuesday decided to retain its benchmark cash rate at record-low of 2.5 percent, in line with economists' expectations.
At the meeting, the Reserve Bank Board noted that the current setting of the monetary policy remained "appropriate".
The Board said it will "continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the target."
In a statement, RBA Governor Glenn Stevens said Australian dollar rose recently, but is still about 10 percent below its level in April. A lower level of the currency than seen at present would assist in rebalancing growth in the economy, he said.
Stevens said the full effects of easing in monetary policy since late 2011 are still coming through, and will be for a while yet.
The economy has been growing a bit below trend over the past year and this is expected to continue in the near-term as the economy adjusts to lower levels of mining investment, Stevens noted.
British Pound Clearly Overextended, but When Would we Sell?
The British Pound trades to fresh 9-month highs versus the US Dollar, but these key signs suggest that GBPUSD gains are unsustainable. Instead of selling into such strength however, we’ll watch for these factors for major signs of turnaround.
British Pound is now 5% Above its 200-day Simple Moving Average
The British Pound now trades 5 percent above its 200-day Simple Moving Average, a level which has coincided with significant turning points in 2010 and 2011.
The month of September likewise saw the single-largest GBPUSD gain since July, 2010, while the weekly RSI recently hit its highest levels since November, 2007.
Gains are clearly overextended and the current pace of British Pound appreciation is unsustainable. Does that mean we see a sharp turn lower?
2013-09-18 22:45 GMT (or 00:45 MQ MT5 time| [AUD - Trade Balance]
if actual > forecast = good for currency (for AUD in our case)
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Australia Has A$815 Million Trade Deficit In August
Australia posted a seasonally adjusted merchandise trade deficit of A$815 million in August, the Australian Bureau of Statistics said on Wednesday - marking a 41 percent gain from the previous month.
The headline figure missed forecasts for a shortfall of A$400 million, but it narrowed significantly from the revised deficit of A$1.375 billion in July (originally called a shortfall of A$765 million).
Exports added 3.0 percent on month to A$27.116 billion from A$26.306 billion in the previous month.
Goods and services credits added A$810 million (3 percent) to A$27.116 billion. Non-rural goods gained A$565 million (3 percent) and non-monetary gold surged A$307 million (33 percent).
Bullish Euro Momentum Wanes Ahead of ECB- Key Reversal on Tap?
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Trading the News: European Central Bank Interest Rate Decision
The European Central Bank (ECB) is expected to keep the benchmark interest rate at 0.50% as the monetary union returns to growth, but President Mario Draghi may show a greater willingness further embark on the easing cycle in an effort to encourage a stronger recovery.
What’s Expected:
Why Is This Event Important:
During his testimony in front of the European Parliament, President Draghi argued that the central bank could implement another LTRO if needed, and the Governing Council may sounds more dovish this time around amid the growing threat for deflation.
How To Trade This Event Risk
Trading the ECB interest rate decision may not be as clear cut as some of our other trade setups as the press conference with President Draghi ends with a Q&A session
Bearish EUR Trade: ECB Sees More Non-Standard Measures on Tap
- Need to see red, five-minute candle following the decision/statement to consider a short EURUSD trade
- If market reaction favors a short Euro trade, sell EURUSD with two separate position
- Place stop at the near-by swing high/reasonable distance from cost; look for at least 1:1 risk-to-reward
- Move stop to entry on remaining position once initial target is met, set reasonable limit
Bullish EUR Trade: Draghi Shows Greater Willingness to Retain Current PolicyADB Trims Developing Asia Growth Outlook As China, India Slow
The Asian Development Bank, or ADB, on Wednesday slashed its economic growth forecasts for developing Asia, citing more moderate economic activity in China and India as well as widespread concerns that possible tapering of US stimulus program could impact growth in the region. ADB revised down its 2013 GDP growth forecast for the region to 6 percent from 6.6 percent seen in April.
2013-09-18 22:45 GMT (or 00:45 MQ MT5 time| [USD - ADP Employment Change]
if actual > forecast = good for currency (for USD in our case)
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U.S. Private Sector Job Growth Falls Short Of Estimates In September
In a report that may take on increased importance due to the likely delay of the government report, payroll processor ADP released a report on Wednesday showing that private sector employment in the U.S. increased by somewhat less than expected in the month of September.
ADP said the private sector added 166,000 jobs in September compared to a downwardly revised increase of 159,000 jobs in August.
Economists had expected private sector employment to increase by about 180,000 jobs compared to the addition of 176,000 jobs originally reported for the previous month.
With the government shutdown likely delaying the release of the Labor Department's monthly jobs report, Sal Guatieri, Senior Economist at BMO Capital Markets, said, "This means the ADP report might be our best guide to actual job growth in the month,
"Its track record is far from perfect, but the picture it paints is one of still-lackluster job creation," he added. "Business sentiment weakened ahead of the government shutdown, and a prolonged closure or payments default later this month would only sour the mood further."
ADP said service-providing industries added 147,000 jobs in September compared to the addition of 152,000 jobs in August.