After initial weakness, European majors turned sideway against the greenback as recent selling momentum was exhausted. Focus was then turned too selling in commodity currencies and yen. After a rather volatile week, AUD/USD ended as the biggest mover, losing -335 pts, or -3.71%. EUR/AUD was indeed the second largest mover, up 514 pts, or 3.59%. The order of weakness Aussie, Kiwi, Yen and Loonie. On the other hand, Euro has indeed registered as slight weekly gain against dollar but that was rather ignorable as EUR/USD was just consolidating in tight range. Overall, the tone of dollar remained generally firm.
There were a few developments that’s driving the markets last week and here a quick recap. The markets are now in clear consensus that Fed is going to raise interest rates next year. Analysts are indeed anticipating a change in the language of the FOMC statement this week to reflect that. Such expectations drove stocks mildly lower while clear weakness was seen in commodities, including gold and crude oil. On the other hand, US treasury yields was shot up by such expectations with both 10 year and 30 year yield showing sign of trend reversal. Such developments drove the dollar sharply higher against commodity currencies and yen.
Secondly, markets seemed to be paring the bearish bet on Sterling as the Scottish independence referendum approaches. After some steep selloff, Sterling has indeed recovered much ground last week and ended higher against yen, Aussie, Loonie and Kiwi. Development in GBP/JPY suggested that it has successfully defended 169.53 structural support level and kept the larger up trend intact. Indeed, the cross should be heading back to 175.36 high now. EUR/GBP spiked higher to 0.8065 last week but quickly dropped back to familiar range. The price actions from 0.7873in EUR/GBP maintained a corrective structure and thus, kept the medium term outlook bearish. GBP/USD, on the other hand, recovered but stayed bearish with 1.6534 resistance intact. So, Sterling could be starting turning the corner except against dollar. Of course, the Scottish referendum remains key to the pound’s fate.
Thirdly, Euro is possibly also reversing recent bearish moves against yen and commodity currencies. While the common currency should stay bearish against dollar on ECB policy outlook, it’s weakness is now less clear elsewhere. In particular, EUR/CHF rebounded quite impressively on talk that SNB could adopt negative rates.
So looking ahead, the main focus this week will be FOMC statement, SNB policy statement as well as the Scottish independence vote.
Technically, here are some charts to note. TNX, 10 year yield, surged sharply to close at 2.614 last week and took out the near term channel resistance. The momentum argues that TNX has finally bottomed out at 2.305, on bullish convergence condition in daily MACD, ahead of 50% retracement of 1.394 to 3.036 at 2.215. The development pushed USD/JPY through 107 handle. Near term outlook is cautiously bullish for 2.692 resistance. Break there would pave the way to retest 3.036 high. Such development would continue to give USD/JPY fuel for further rise and could possibly give dollar firm support against commodity currencies.
SPX, SP 500, extended the pull back from 2011.17 last week. Bearish divergence condition in daily MACD is a concern for stock traders. But there is no clear sign of trend reversal yet as the index staying well inside the long term channel. As long as 55 days EMA holds (now at 1968.88), we’ll stay bullish in SPX and expects another high above 2011.17. Such development would likely take USD/JPY even further higher and could slow down the decline in commodity currencies. However, sustained break of the EMA would put channel support in focus. And that could, in turn, limit USD/JPY’s rally and accelerates the fall in commodity currencies.
The dollar index rose further to 84.51 last week but turned sideway since then as EUR/USD digested recent losses. Near term outlook stays bullish, though, as long as 82.83 support holds. Based on current momentum, further rise should be seen sooner or later through 84.75 high. In such case, the whole up trend from 72.69 will resume and target 61.8% projection of 72.69 to 83.75 from 78.90 at 86.35.
Regarding trading strategies, we’re staying short in EUR/USD for more medium term decline. We’ll continue to look for opportunity to add to the short position, at around 1.305, with stop at 1.360, close to 1.3159 resistance. We’re expecting a test on 1.2755 key support level in near term. Meanwhile, our GBP/CAD short strategy was totally wrong. Firstly, traders seemed to thought the prior week’s selloff in the pound was over-reaction to Scottish referendum. Secondly, selling focus has turned to commodity currencies.
As for this week, buying dollar would remain the main theme. In particular, dollar’s rally could accelerate should FOMC change the language of the statement to affirm of the coming rate hikes. Selling of GBP/USD is not preferred unless Scots do vote to go independent. Yen, Aussie, Kiwi and Loonie are the choices to sell against dollar. Based on relative strength, we’d prefer to sell AUD/USD. So to conclude, we’ll hold on to EUR/USD short and sell AUD/USD this week.
AUD/USD’s fall from 0.9504 resumed last week and accelerated after taking out 0.9236 support. The development confirmed head and shoulder reversal (ls: 0.9460, h: 0.9504, rs: 0.9401). Initial bias remains on the downside this week for 61.8% retracement of 0.8659 to 0.9504 at 0.8982. Sustained break there will bring retest of 0.8659 low. On the upside, break of 0.9236 support turned resistance is needed to confirm near term reversal. Otherwise, outlook will stay bearish in case of recovery.
In the bigger picture, price actions from 1.1079 are viewed as a medium term correction. At this point, we’re still slightly favoring the case that such correction is completed at 0.8659 already, ahead of 50% retracement of 0.6008 to 1.1079 at 0.8544. However, such view is dampened by the fact that AUD/USD failed to sustain above 55 weeks EMA and was rejected from there. Further downside acceleration could extend the correction from 1.1079 through 0.8659 to 0.8544 fibonacci level and below.
In the longer term picture, the pattern from 1.1079 long term top is still unfolding. We’re preferring a sideway trading scenario as long as 0.8066 support holds and expect strong support from there to rebound in case of deeper fall. However, note that AUD/USD is holding below falling 55 months EMA and there is prospect of a long term down trend. Sustained break of 0.8066 will open up the case for deeper long term decline to 61.8% retracement of 0.4773 to 1.1079 at 0.7182 and below.