Daily Trade Recommendation

Originally updated: 08:00am London Time

Trading Bias: bullish GBP

Currency pair: long GBPAUD

Given the probable weakness in AUD and strength in GBP we will look to buy GBPAUD near current market price of 1.9550.

Current Sentiment:

The major development overnight was the UK election where exit polls show the Conservative party gaining more seats than forecast and likely to stay in government. This news saw a massive rally in GBP across the board with Cable spiking nearly 200 pips on the initial move. Cable has now broken the 1.55 handle, up 360 pips from yesterday's lows. This return to certainty is very bullish for the pound and will likely keep it well elevated in the coming sessions provided the outcome is as the exit polls suggest.

Yesterday Aussie dropped over 100 pips from highs as the greenback strengthened and traders' presumably took profits/got short on Aussie ahead of this morning's two risk events: The RBA's statement on monetary policy and Chinese trade balance. The SOMP trimmed GDP forecasts 0.25% and noted spare capacity in labour market will remain longer than previously expected. It also stated that "Further depreciation of the exchange rate seems both likely and necessary." It was not an optimistic report but also did not contain any major surprises.

As stated in the risk report, the risk for the Chinese trade balance was on the downside. We saw exports drop 6.4% vs a 2.4% increase expected and imports drop 16.2% vs an expected drop of 12%. These larger than expected drops in trade caused Aussie to fall 25 pips and may continue to keep downward pressure on AUD as the Chinese economy shows further signs of slowing. Overall AUD is relatively neutral however the bias is on the downside and the AUD/USD will take most of its direction from the greenback.

Fundamentals:

The USD remains the strongest currency in the longer term, but the medium-term direction depends on data. US data this week has again been lacklustre. Today's NFP figure will provide direction in the USD for the next few weeks should it come in outside estimates. If the ADP NFP figure is any indication, then we may be looking at a lower reading. This will cause USD to sell off on speculation of later rate hikes.
The EUR remains fundamentally weak and the Greek debt issue, although seems to have taken a back seat, is ongoing. The Euro can easily get a boost on any new USD weakness, which has been witnessed lately.
GBP has regained its place as one of the strongest currencies now that the election polls are showing that the current government will remain in power; a degree of uncertainty has been erased. Services PMI earlier in the week was better than expected and the BOE is still on track to raise rates within the next 12 months.
AUD is relatively neutral with a downside bias. The rate cut has passed and there is little speculation of imminent cuts. Today's SOMP was relatively downbeat and Chinese trade figures showed slowing – both these could weight on AUD.
NZD has a greater chance of easing monetary policy with since the poor employment figures were released. We will watch data to indicate the chance of a cut in the near-term.
CAD remains on the weaker side of neutral until we see more data or direction from the BOC. Yesterday's Building Permits was the highest reading in 6 months. CAD will take most of its direction from any significant changes in the price of West Texas Intermediate crude oil.
JPY remains weak but the market will likely need a new bout of easing to sustain another fall. In the meantime, the sentiment on the JPY can turn bullish very quickly if there is uncertainty in the markets. Today's BOJ meeting minutes provided little in the way of insight.
CHF is fundamentally a weaker currency given the SNB's negative interest rates, however it is highly susceptible to volatility due to SNB potentially intervening to weaken the currency as it tends to strengthen on safe-haven demand. CHF often will take direction from the EUR with which its correlation over the last 50 trading days is 74%.

Technicals:

We look for support at 1.9550 on GBPAUD as it has recently pulled back 100 pips from highs.

Other Market Moving News:

In the North American session we have the major risk event for the week – US Non-Farm Payrolls. This is highly anticipated and will cause huge volatility in the markets.
Concurrent with US NFP we have Canadian employment change. This will likely be overshadowed by the US figure.
Over the weekend we have Chinese CPI which may see AUD gap on Monday should there be a large deviation.