The USD still out of favour with traders

The USD continues to be out of favour with traders, and while our fundamental bias is for a resumption of the USD uptrend, the technicals seem to be less constructive for the USD.

We will always back the technicals in times of disagreement, thus we are happy to revert to the sideline on our USD call right now.

A ‘tapering’ announcement in September continues to gain traction by the day in our opinion, and this was again be highlighted with the four-week average on the weekly jobless claims falling 6250 to 335,500 - effectively the lowest since November 2007. The weekly claims are obviously not as closely watched as the non-farm payrolls, however they do play an important role in the Fed decision making and we would expect this metric to flatten out over the rest of the American summer. It should continue to print pretty close to 330,000 a week, which highlights the improving trend seen here. Dallas Fed president Richard Fisher (a well-known hawk) once again made his views known by saying tapering should occur in September unless the economy worsens; however it’s positive for risk that US bond yields don’t seem to be getting much traction to the upside, despite a poorly bid thirty-year bond auction yesterday.

EUR/USD has broken its longer-term downtrend yesterday, but whether it sustains this and breaks the June 19 pivot of 1.3417 is yet to be seen. AUD/USD has seen a decent squeeze this week and is testing the April downtrend itself. AUD bears that have been on the sidelines (and not on the wrong side of the 2.3% move) this week will be feeling pretty happy about the shake out of short positioning that has occurred, with the weekly move (as it stands) the best week in sometime, although it’s coming off the back of the worst week since October 2011. We can’t rule out a continued squeeze higher, but feel moves to 0.9300 should be capped.

Once again there’s been plenty of news in Asia for traders to focus on, with China and Australia taking centre stage. Chinese CPI stayed unchanged at 2.7%, although the 5% rise in food will be a modest concern; however on the whole this print, backed by a 2.2% decline in purchasing prices, is a general positive for risk. With inflation expected to tick down in August, the cries for a reserve ratio requirement (RRR) cut have made the rounds on the floors, although a move will be driven by potential capital outflows.

We await the rest of the day’s data dump, although our main focus will be on industrial production (expected to stay unchanged at 8.9%), given it has been a better indicator of the underlying economy than other data points such as the official PMI. Still, good numbers today will certainly keep the momentum alive after yesterday’s solid growth in exports/imports and signs that foreign demand is recovering. Interestingly, around one third of the increase in imports was directed towards processing and subsequent re-export, which suggests export demand is improving. Comments from Vale yesterday also highlighted that things in China are not too bad, when it suggested late Wednesday that China steel output will increase 10% this year.

In Australia the market had one eye on China data, while FX and rates traders were also firmly focused on the RBA’s Statement on Monetary policy (SoMP). There were certainly some who were positioned short in AUD and resource equity names in anticipation that the RBA spoke more openly about a slowdown in China; this didn’t materialise and the central bank showed limited concern.

The downgrade in growth projections for 2013 to 2.25% (from 2.5% in May) was fully expected, and the fact that it left 2014 forecasts for both growth and inflation unchanged may have forced a few traders to cover shorts as well. The clear easing bias it has recently had in place seems to have been watered down as well, and again this could be another reason why we’ve seen AUD/USD push up to 0.9129 today.

On the equity front there’s been a decent rotation out of the Australian banks and into materials names, following on from yesterday’s Chinese export print. Clearly there’s a change in investor sentiment around China’s growth, with many previously feeling a 6 handle could be on the cards at some stage later this year, if not 2014; those expectations are now being unwound, while money is also flowing out of banks.

European markets look good for a firmer open, although it should be affected by the rest of the China data dump. Corporate earnings are light today, with only Prudential coming out. On the data side we get French industrial and manufacturing production (both expected to gain 0.3%), while the UK trade balance figures are released. From a currency perceptive Canadian employment figures will take centre stage, with the market expecting an unchanged unemployment rate of 7.1%, while the economy should have seen 10,000 jobs created. We’ve seen a slight bias to buy CAD today, following the short-term trend; however a broader look at our internal positioning shows 68% of our client base hold long USD/CAD positions.

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