IG Markets: Forex Thoughts

AUD/USD

Once again the AUDs reputation as a proxy for global risk sentiment was confirmed during US trade on Friday. After ending the Australian session around the 1.0545 mark, the AUD surged to an overnight high of 1.0601 during European trade. However, as the US session unfolded, a new fear began to surface with concerns that the Greek government would fail to pass the 5-year austerity plan which was endorsed by the EU and IMF the previous day. Investor sentiment whipsawed on every new rumour, and essentially jumped at shadows. As a result, equities were sold down sharply and the AUD predictably followed suit, falling to a closing level of 1.0487. Upon re-opening for Asian trade, the AUDs negative momentum continued, with traders pushing it down into the 1.0430 range where it has remained over the course of the day. With heightened levels of fear in the market, traders are taking a ‘sell first, ask questions later’ approach. It will be a matter of if and when the Greek austerity package is approved when buyers are likely to return.

USDJPY

The USD opened higher against all G10 currencies in Asian trade, as risk aversion set in on reports that four Greek ministers are to vote against the upcoming austerity measures. Interestingly, the dollar index (DXY) looks set to break its long-term downtrend, which could indicate further upside. The end of QE2 could be one reason behind this. We are seeing further flows into USD/JPY, despite other risk currencies coming under pressure and US treasury yields hovering near yearly lows. Fundamentally, there is really little reason to hold US dollars, but with the USD being the world’s reserve currency, it will always attract capital flows in this low sentiment environment. Technically, USD/JPY is attempting to turn higher again, with the price above its 20-day average and the former trend line resistance now acting as support. A break over 81.05 would be a positive development, and would indicate the first move above a multi-day pivot since April. Upcoming economic releases on US personal income and spending are expected to show modest increases, however given that even a strong beat will not alter the Federal Reserve’s way of thinking, the USD will probably not see a huge reaction.

EURUSD

It was another very weak US session for EUR/USD on Friday as the selling continued from European trade, although prices did manage a late rally from the earlier low. The market chose to ignore the stronger-than-expected US durable goods orders, which came in at 1.9% versus expectations of 1.6%. Instead, everyone continued to worry about the pending Greek vote on the latest austerity plans and the possible ramifications in terms of contagion if they are not passed. EUR/USD traded to a low of 1.4140, before stabilising and closing at 1.4179. In Asian trade, EUR/USD opened slightly higher at 1.4190 before coming under renewed attack and breaking down through support around 1.4120, following rumours that four members of the ruling Greek Pasok party would not vote in favour of the austerity measures. From a technical perspective, EUR/USD has busted down through Thursday’s low at 1.4126 and looks to be testing figure support at 1.41 and recent lows around the 1.4170 level, where we would expect some buying and short covering. Looking ahead, the market is 110% focussed on the EU situation, where the Greek government is due to start debating the latest austerity plans tonight. Rhetoric released surrounding this event is going to be the main driver of markets in the coming hours.

GBPUSD

Sterling logged its third straight day of losses against the dollar on Friday, as speculation over further quantitative easing gathered momentum and triggered fresh short-selling along with the reversal of existing long positions. General risk aversion also weighed, as the cable traded to a low of 1.5950 before ending the session slightly higher at 1.5968. Interest rate hike expectations have been completely unwound recently as the Bank of England has remained very dovish following a raft of economic data that pointed towards quite a weak British economy. In Asian trade, the sterling has seen heavy selling pressure as the US dollar continued its rally. After opening at 1.5958, it fell to a low of 1.5912 before recovering slightly to be around the 1.5930 level. From a technical perspective, GBP/USD is trading right around crucial support through 1.59; if the market makes a decisive break through this level then we could see it target the next significant support range around 1.5750.

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