Last week I wrote that I expected a large drop in AUDUSD if the RBA signaled that they would be holding rates steady. Well they did, and boy did we get a drop. The pair has fallen down to the 0.8800 level. The 0.8600 level still stands as a strong support level, and I believe that the week’s trend of a falling AUDUSD will continue into tomorrow.

As far as tomorrow’s unemployment rate goes, Yohay Elam of ForexCrunch.com writes that “a drop up to 9.5% or a rise to 9.9% won’t make a difference”, and I agree with him. There is a good chance that this move will bring AUDUSD down to its support near 0.8600. This would be much sooner than I expected, but the market doesn’t really care what I think.

Whether USD will continue to gain strength into next week, is a hard call to make at this point. But, generally if we have a strong negative week, the next week opens to the upside, so I would not want to be in an AUDUSD short over the weekend. Of course I wouldn’t want to be long either.

Next week brings some very important news with it. On Tuesday we will see if the RBA will be hiking rates for the third consecutive time. There will be US unemployment data and a rate statement by the ECB. While the volume of data is not very high the importance of it is.

The market is slowly falling into risk aversion and it will have little reason to change course unless we get some new information.

Monday 5/3

No important news scheduled.

Tuesday 5/4

4:30 GMT Australian Interest Rate Decision

The expectation is for the RBA to hold, but this will be a close one. Don’t be surprised if they raise rates again. If they do it would be a short term gain for AUD, since there is a relatively high level of uncertainty about the decision. Watch the statement though for signs of the end of the rate hikes.

Wednesday 5/5

No important news scheduled.

Thursday 5/6

12:30 GMT ECB Interest Rate Statement

The ECB will continue to hold here, and for the foreseeable future as well. Trichet has little to no power over the Greece situation at this point, so his only option is to stand back and watch. Don’t expect much to come out of the statement.

Friday 5/7

12:30 GMT US Unemployment Rate

The unemployment rate in the US has stood at 9.7% for three months now. A lot of the employment strength has been due to seasonal adjustments by the BLS. The current down trend in unemployment could be tested here

AUDUSD remains constrained by its lower highs, a trend that began this month. There is still support just above the 0.9100 level; however the price action suggests that this support will be broken. The pair has been trading in a large range over the last six months. The lack of interest rate movement out of the Fed will likely contain the pair to this range.

The return to the bottom of the range around 0.8600 will most likely be triggered by a signal from the RBA that they will be holding rates steady. As long as they continue on their rate hiking cycle, the pair should be bolstered to the top of the range. There is strong profit potential for an AUDUSD sell, this would be a long term trade, with a larger stop loss above the recent highs around 0.9370 that would target a return to the 0.8600 level. This trade should be exited if either the Fed or RBA signal imminent rate hikes.

Down Trending Highs In AUDUSD

The market is not looking promising for risk appetite this week. Equities broke down below 1200 on Friday, and they remained under that mark in todays trading. The talk is that the SEC’s investigation into Goldman Sachs is what is causing this risk aversion, that may be the case but this type of news rarely has a lasting impact in the market, I believe that there is still hope for risk appetite this week.

Despite the poor showing in the equities market, AUDUSD made back half of its losses that it incurred since last Thursday. The pair still has a bit of strength left in it and looks to have set a course for 0.9285.  EURUSD has followed the same general movement as AUDUSD but a bit more subdued, although any short term gains in EURUSD would have a hard time breaking above 1.3515.

The one pair that remained intertwined in the equity price action was USDCAD. The pair has held on to its gains from last week. Partially to blame is its proximity to parity, which always seem to make USDCAD act outside of the normal correlations. The other, perhaps more important, reason for the relative strength of USD against CAD is the movement in oil which has fallen to just above 80 dollar a barrel in the last few trading days.

The long term trend is still in favor of risk appetite however, it looks like the most likely scenario is for the market to take a breather in the short run. This is only natural when you look at the price action since February.

Our friends at the Pragmatic Capitalist write:

As the can’t lose market continues to power higher I just can’t help but think about some of the catalysts that lie in our path over the next 24 hours.  Investors have been front running the current earnings season with very bullish expectations and the next 24 hours could prove them right as Intel and JP Morgan are set to report.  In addition,the commerce department is set to release their monthly retail sales report tomorrow and current low expectations could add fuel to the bullish fire.

full article

They are expecting a strong showing of risk appetite tomorrow, citing better than expected earnings and Bernanke’s zero interest stance as the catalysts. If this proves to be true, look for the S&P to break past 1200.
This would be an enormous boon for risk AUD, and would bring a nice rally in the carry trade. While today’s price action in US equities showed 1200 as a still unreachable target, it came right back up to that mark at the end of the day. This is quite promising for those looking to take a bite out of the risk apple.

Even though the short term relationship between the US dollar and equities hasn’t been too strong as of late, it is still a powerful indicator to watch over the medium term. The S&P is facing some serious resistance at 1200 on both a technical and sentimental level. Remember that once the market fell below 1200 in 2008 it moved into the free fall that has taken the last year to recover from.

What we can say about this in reference to the dollar is that as long as the S&P stays below 1200 the dollar will continue to gain strength, especially against EUR. Above this mark however, the dollar will most weaken as investors become hungry for risk and seek out higher yields in their currency holdings.

Which brings us to AUDUSD. This pair has moved into the spot that EURUSD has in relation to equities. Australia is the highest yielding major currency, so look for new highs in the pair as the S&P breaks through resistance.

For more information about using equities to help trade Forex, read my article: A Guide to Intermarket Analysis Part 2: Equities.

After today’s announcement it is clear that Australia is continuing on its course to tighten monetary policy. The consensus is that they are targeting a 5.25% interest rate, according to a recent Bloomberg article. But, what about the rest of the world?

According to Bloomberg we will have to wait some time until we get rate hikes outside of Australia.

Policy makers have “gotten their eye off the immediate ball, which is deflation risk,” said Joseph Gagnon, a former Fed official who is now a senior fellow at the Peterson Institute for International Economics in Washington. “It’s misguided for anybody to be talking about exiting” from stimulus during the next year.

Trichet’s ECB Governing Council convenes April 8 as Mark Wall, Deutsche Bank AG’s chief euro-area economist, and Janet Henry, HSBC Holdings Plc’s chief European economist, scrap forecasts for the refinancing rate to be raised this year from a record-low 1 percent. Both now expect the first increase since July 2008 to come next March.

Major central banks “are going to stay on hold longer than otherwise, keeping zero rates or near-zero rates at least to the middle of next year,” Nouriel Roubini, a New York University professor and chairman of Roubini Global Economics LLC in New York, said in an interview.

According to the Fed, inflation will be kept at bay for quite some time now. In other words, there will be no interest rate hikes for quite some time. The Fed has stuck to the term “an extended period” so look for the exclusion of this term to signal the beginning of a move toward rate hikes.

It looks like AUDUSD has considerable fundamental strength behind it, possibly enough to return to its highs, if not break them.

The entire Bloomberg Article can be read here.

So, the Reserve Bank of Australia, raised rates again, no surprise there. And in their statement that began and ended almost exactly the same as their last one, it was implied that they will be hiking them again in the future. They ended with the statement that they would be bringing interest rates back to their average levels and that this rate hike was “a further step in that process”.

There was some talk about the housing market in their statement, however at this point it doesn’t look like it will halt future rate hikes, but watch the housing data for a significant move toward weakness in the market. If this begins to falter then so do the odds of a rate increase.

Looking at the charts, AUDUSD has been pushing up on the high from March 17^th. If it can break past here it would face some considerable resistance around 0.9310. Despite pushing up on resistance, don’t forget that AUDUSD has been in a down trend since last November. So if the pair falters at the current level expect a return to support at 0.8600. The largest risk to AUDUSD strength is rate hikes out of the Federal Reserve, which are expected to come this year, as early as this summer.

In the yen pairs, AUDJPY has been the strongest pair. It bounced off of 86.18, which was the high from January 11^th. The benefit of trading AUDJPY over AUDUSD is that rate hikes in the US would be beneficial to AUDJPY. So, you can still play AUD strength without fearing an increase in dollar strength.

The effect of the unemployment data on the market was enhanced by the thin trading volume that the week closed on. Although this was the strongest and first positive reading since January 2008, it was not strong enough to incite confidence in the market. The dollar rose on risk aversion due to fears of too weak job growth.

Next week opens up on thin trading due to Easter Monday in Europe. There are also three interest rate decisions coming out of Australia, England and the ECB. There is also a Japanse interest rate decision, but don’t expect anything out of it.

Monday 3/29

14:00 GMT ISM Non-Manufacturing PMI and Pending Home Sales

The ISM and home sales data could be more significant than normal due to the below average liquidity on Monday. Traders should be aware of this.

Tuesday 3/30

4:30 GMT Cash Rate and Rate Statement

The Australian rate decision is expected to be up twenty-five basis points. AUDUSD will fall hard if this doesn’t happen. If the statement confirms that they will be continuing to increase rates look for AUDUSD to break above its highs.

Wednesday 3/31

8:30 British Services PMI

The expectation is for a slight decline but still within the expansionary levels. It would take a reading far off from expectations to have an effect on the market.

14:00 GMT Canadian Ivey PMI

Canada has shown itself to be a very resilient currency. The PMI data is expected to see a modest increase; this could be quite a boost to CAD strength

17:30 GMT Bernanke Q&A

His speech is never the important part. What is important is the question and answer section. With rumors of a change in the discount rate, this could be an important even if they do increase the rate.

Thursday 4/1

1:30 GMT Australian Employment Change and Rate

Even though 20K new jobs are expected the unemployment rate is not expected to change. Given that we will get an interest rate statement two days before this, it is unlikely to be an impacting event.

11:00 GMT BoE Official Bank Rate

This is only of significance if we get a rate hike, which is not likely to happen. If it does, look for massive GBP strength.

12:30 ECB Interest Rate Statement

The actual rate change comes in and hour and a half before this but since it will most likely not change the statement is far more important here, although I believe Trichet will only reiterate what he has stated in the past, rate hikes to come at the end of the year.

Friday 4/2

0:30 GMT Bernanke Q&A

More question and answer out of Bernanke, this is less likely to be impacting since he will be doing the Q&A session on Wednesday

11:00 GMT Canadian Unemployment Change and Rate

This looks to be strong for CAD as the employment situation is expected to show further strengthening out of Canada.

This week has seen the yen take major hits across the board. Is this the end of the carry trade fallout? Or is this just a head fake in expectation of positive employment data?

Look back at USDJPY in the long term, all the way back to 2007, and you will notice that it has broken that long term down trend. Meanwhile, EURJPY and GBPJPY are pushing up on former support levels and we have AUDJPY pushing up on medium term resistance.

Most of the yen pairs have bounced off of the 61.8 on the Fibonacci retracement drawn from the bottom of their unwind to their recent highs. Add on to all of that, the room that a yen sell has to grow and you have set the stage for a profitable long term trade.

Of course the one factor missing is the equation is of course the high paying interest rates. Australia leads the pack with a (relatively) whopping 4%, giving it a 3.9% advantage over the yen. The euro lags behind with a 1% yield followed by the UK at 0.5% and US at 0.25%.

Tomorrow’s employment data could have a significant, but short lived impact on the yen pairs. The expectations for the non-farm employment change are high, and likely to fall quite short, however the rate could come in line or even better, so it is hard to say which one will have the higher impact. Regardless of the outcome tomorrow we will be getting rate hikes this year, but not for at least three more months. If history serves as a warning, the carry trade will take off before the rates go up.