Morning Report - USDJPY is about to break lower, AUD lag tells a story

I've been hosed this week as I have deviated from my usual short term technical intra and day trading style in favour of a more rhetorical style I used to use as a fund manager or bank trader. I need to be up front about that lest what I write below be misconstrued as trying to defend my piece on the Aussie souring a bit even though it has rallied 100 pip from the open on Monday. 

But when I look at the price action of the Aussie and the Kiwi over the past day or so and when I look at the performance of Dr Copper overnight which was off more than 1% it seems to me that with the data souring globally the Aussie is starting to feel the winds of change. Change that suggests there might be a little rotation away from its role of leader in the global FX landscape and reciever of more than its fair share of excess reserves and spare cash from global investors. 

Letme explain. 

TheAussie opened the week around 1.0270/80 and spiked higher on Monday. Last nightwith the big spike down in the Chicago PMI saw the Euro rally around 100 ptsbut the Aussie didn't move. The reason I would hypothisise is that the Aussieis returning back to a bellwether of growth rather than the safe harbour roleit has played for most of the past few years. The reasons were articulated inmy piece this week but the price action overnight to me reinforces thisnotion. 

Certainly the Euro benefited overnight and the Yen strengthened with USDJPY lower but it's the Canadian Dollar which is heading back towards 1:1 with the USD that is also a major beneficiary and the AUDCAD rate that shows that the Aussie is lagging on this bout of US dollar weakness which reinforces to me and us that even though the Aussie is up this week from the open around 1.0270/80 the outlook has soured a little for the battler recently vis a vis its previous place in the pantheon of currency gods.

AUDCAD is very close to breaking down as the trend line above shows and a push below1.0380 which is the 200 day moving average would signal that the current break is confirmed and target 1.0233. It would also signal the worm has turned for the Aussie

Interesting also and a signal that perhaps the currency game is changing a little is the fact that the AUDNZD had a small rally signalling that the Aussie Dollar outperformed the Kiwi which has done so well it pushed AUDNZD down below 1.21 when the "fundamentals", such as they are, suggest something closer to 1.26/28. We'll keep and eye on the Aussie and the Kiwi and in particular Dr Copper which was down 1.10% overnight because they are signalling that the global economic reality is seeping into FX markets and that has big implications across the board.

Looking at the data then overnight the much weaker than expected Chicago PMI data overnight which showed a fall to 49 from 52.4 last and the expectation of 52.5 failed to shake stocks with the S&P 500 closing on a new all-time high bu tit certainly shook the foundations of the US dollar which fell 1 cent agains tthe Euro in the blink of an eye. How this can be when the European unemployment data earlier in the night showed further deterioration in unemployment picture is difficult to fathom. Equally in the context of the better than expected result in the rise of the Case Shiller home price index, up 9.3% YoY in Feb,and the huge surge in Consumer Confidence from 61.9 to 68.1 the Dollars weakness is hard to fathom.

As the chart above shows this US dollar weakness has driven the Euro back toward the top of the 1.30/32 box or range it has been in for a while now. One of our favourite risk reward trade set-ups is a top, retracement and then break (the reverse is also true) which then usually projects a move toward 1.382 of the move.

Sothe key levels in the EURUSD to watch are 1.31995 with a break projecting1.3374.

Turningto the USDJPY I am more convinced that the point we made on Monday is the rightone, 

Japan is clearly far from fixed but to the extent that the Abe Government and Kuroda BoJ have made an impact on USDJPY which has weakened 25%against the USD and by implication a little more against the CNY and the Won then you might say job done for a while. Equally as I noted above the inflationexpectation is for the rate to be close to target in roughly the time frame setthen perhaps the topside pressure on USDJPY has reduced for a while – time will tell."

We continue to hold that view and with the data this week being on the globally weak side Yen strength may return for a while.

The chart above shows the Yen strengthening with USDJPY sitting in the support zone we have identified this week as key to the outlook. the low over night of 97.01 is right at the bottom of that zone and a print in the 96'sis likely to bring in further selling.

Turning now to stocks and at the close of play the S&P made another marginal new high up 4 points or 0.28% to 1598. The Dow was up 0.14% to 14840 and the Nasdaq rose 0.66% to 3329. in Europe the FTSE was down 0.43%, the DAX managed to rise 0.51% and the CAC, Milanese and Madrid stocks all fell losing 0.30%, 0.96% and 0.38% respectively.

It is interesting to see the differing outlook between the stocks in the US and the US dollar and then the performance of the Aussie and Kiwi dollars which lagged and Dr Copper which fell. The outlook is certainly turning economically and the performance of stocks in this generally weaker May to November 6 months will be interesting to watch. Tonight Fed Statement after their meeting will be interesting to see.

Oncommodity markets as we noted Copper was down as was Nymex crude which fell1.58%, Natural gas fell 1.16%, gold was up marginally to $1476 and on the AgsCorn fell 0.11%, Wheat rose 1.69% while Soybeans fell 0.27%

Data

ItsMay the First so it s the Labour day holiday in Europe. In Australia today weget HIA new Home Sales and in China the NBS Manufacturing PMI. ADP employmentis important in the US in the run up to Friday's non-farm payrolls and the Fedis crucial tomorrow morning.

Twitter: Greg McKenna or @macro_business