The price action for most of the London session has been whippy, with some sharp reversals after EURUSD got close to 1.34 and USDJPY edged past 90.00 earlier. These snap backs tend to be a common occurrence on a Friday as traders look to square positions into the weekend. But the combination of next week’s BOJ meeting, regional elections in Germany on Sunday and also snow in London that could spark some to exit the City early today and you have the potential for a volatile afternoon.
Fundamentals drive sterling
Economic data was fairly thin on the ground today, but UK retail sales left their mark on sterling. Although sales rose from December 2011 they declined by 0.3% between November and December last year. Added to that, the amount spent in December relative to November was also lower, but that may have been down to the now traditional December discounting season kicking in. This data is not disastrous, but it does suggest the UK consumer is cautious as we start 2013. This triggered another leg lower in GBPUSD, which is testing a key support level at 1.5930 – the 200-day moving average. A move below this level is a very bearish development for this cross and could lead to further declines to 1.5830 – the low from November.
As we mentioned yesterday, the FX market hasn’t been trading with a unifying theme of late. The euro rose, but sterling has been falling. On a broad-based basis the pound has fallen more than 2.5% so far this year. So does this mean that Europe’s prospects are much brighter than the UK’s? I would argue not really, instead it is probably a reflection that a lot of the bad news about Europe is baked into the cake, since EURGBP fell to multi-year lows last year it is looking oversold and due a reversal. Likewise, the relative outlooks for the UK and US economy also suggest the pound should weaken versus the dollar. The only currencies that the pound is making headway against in the G10 is the yen and the CHF, but the pound is definitely in the weak basket of currencies right now and with interest rates so low and unlikely to move higher any time soon, the pound could soon start to be used as a funding currency. Thus, we may not have seen the bottom in sterling just yet. The daily momentum indicator is not looking oversold at this stage, and while in the short term 1.5930 could be a sticky level we believe this cross will trade through this level and trend lower in the medium-term.
Be patient with the Aussie dollar
The Aussie is also one of the worst performers this quarter; however, we believe it is worth being patient with the Aussie dollar as we think it could recover after selling off sharply this morning even though Chinese GDP for 2012 beat expectations. AUDUSD is now below 1.05. Is this justified? Although China’s annual growth rate at 7.9% for 2012 was the lowest level in more than a decade, the economy seems to have turned a corner, which could feed into Australian growth down the line. Added to that, the Chinese data should help boost the price of iron ore, which recently made a 2 year high, which is one of Australia’s most important exports. Thus, we could see AUDUSD trade in a range between 1.0450- 1.0600 in the medium-term. The longer term outlook for this cross will be dependent on whether or not we get further evidence that the Chinese economy is picking up.
Politicians need to avoid fiscal and debt-ceiling Armageddon
Data to watch today includes US consumer confidence due at 1455GMT/ 0955ET. We expect the rest of the day to be fairly choppy with investors squaring positions. So far European stock markets have been giving back early gains and are fairly flat. It appears that the markets are getting jittery as we approach key levels like 1.34 and 90.00 in USDJPY and edge closer to key levels in stocks like 8,000 in the Dax (only 250 points away) and 1,500 in the S&P 500 (only 20 points away). In the absence of any major drivers investors may continue to take profits. It looks like the next leg higher in the USDJPY, EURUSD and stock market rally will be dependent on central bankers filling up the punchbowl even more and politicians managing to avoid fiscal and debt ceiling Armageddon.
One to watch: AUSDUSD:
As we mention above, this cross has been immune to better than expected Chinese data today and has not followed the price of iron ore higher in recent weeks. We think this cross will be picked up on dips and could be range trade between 1.0490 and 1.0600 in the medium term. There is good support to protect the downside including 1.0350 – 200-day sma – that could limit the downside, added to this momentum indicators do not suggest a sell off is on the way in the medium term.
Chart 1: AUDUSD daily chart