If QE3 was about weakening the US dollar, as I believe it is in a very large part, then the Fed and Bernanke will be very disappointed. The Dollar Index traded over 80 last night for the first time since the launch of the Fed's latest monetary bazooka and as I continue to write I think the idea that it is going to weaken significantly are misplaced.

FX is a least ugly competition and the US dollar is just a little better looking than some. I like the way that Michael Derks from FXPro in London summed it up for the Wall Street Journal

“Defiantly ignoring the negative prognostications of the vast majority of currency strategists and commentators, the dollar has recorded a modest appreciation of 1.5% since the Fed announced unbounded QE four weeks ago,”

Indeed as the stock market swoons again overnight the US Treasury issued $21 billion of 10 year securities at 1.70% which was the 4th lowest issuance rate ever and had a bid to cover ratio of 3.06 - people still want the USD and US Treasuries.

Which makes the Australian dollar's rally all the more remarkable in light of the weakness in stocks - maybe I'm wrong, maybe the Aussie is really a safe haven now because the price action over the last couple of days when the Dow has dropped more than 200 points is truly amazing. Least ugly contest perhaps is why the Aussie is doing so well because even with all the challenges facing the economy the IMF and World Bank have reiterated Australia is one of the few Countries on the planet which is going to grow at "trend" over the next year or so - that in itself, or at least the expectation, is remarkable - so why wouldn’t the Aussie rise against other currencies? As I write the AUDUSD sits at 1.0230 and EURAUD has just slipped back below 1.26. Remarkable!

The AUD remains in a a broad 1.0150-1.0260/70 range for the moment and this was the high overnight before the slight pullback to the 1.0235 region where the AUD sits now. Should the AUD be able to push through 1.0270 then we’d be looking for an extension to 1.0325/30 and above here 1.04. Its range trading for the AUD at present and trading a shorter time frame unless or until either side of this range breaks is favoured.

Longer term the dailies are still pointing down but unless or until the range breaks the move toward 0.9970 is on hold.

EUR/AUD – Not drowning waving

The EURUSD slide down toward very solid support at 1.28 making a low of 1.2835 overnight before bouncing. This weakness however was enough to knock EURAUD substantially lower and it didn’t bottom out until 1.2560. This was a little below our expected support at 1.2576 which is the 50% level of the recent up move.

As you can see in the 1 hour chart above EURAUD is weakening again but unless it takes out 1.2560 we’d expect a consolidation over the next day or so.

The question for this cross is can AUDUSD break 1.0260 and kick higher and can EURUSD fall below 1.28. It would seem that these two events are probably incompatible so fundamentally we’d expect buyers to re-enter the market in the 1.2550/60 zone. If these zone breaks however then EURAUD is headed substantially lower.

AUD/JPY – Shines as AUD outperforms

The AUD’s strength coupled with USD strength overnight drove this pair to a high of 80.40 before it turned around. This high was on the downtrend line highlighted in the daily charts over the past few days and the down trend is thus reinforced for now.

The AUDJPY still remains in a downtrend on both the daillies, 4 hour and 1 hour charts based on the ADX and our JimmyR indicators. Like the AUDUSD though the AUDJPY continues to find support at and around the range lows. One of our systems had been triggered short and the move higher did not stop it out yet and it will actually take a break
of 79.30 to confirm a continuationof the down move. Not a big position but we’ll see how it fares.

On the day support 79.83 would signal a deeper move on the 15 minute charts and then 79.30/35 is huge on the dailies. Resistance 80.25, 80.40.

AUD/NZD – building momentum to the topside

As noted yesterday we were expecting a more positive tone in this pair but while the 1.2514 zone we identified was initially resistant AUDNZD kicked on early this morning to make a high of 1.2540 for 4 of the last 9 hours as I write. A move to 1.2570 may be in the offing if 40 breaks and we expect solid support around 1.2514 and then 1.2490 on these very short time frames.

Longer term we believe this is in a strong accumulation zone even though the downtrend remains intact for now. We’d be long on a 3 month time horizon and a happy buyer and holder of AUDNZD anywhere near 1.2350 and while this level holds.

Greg McKenna