Emerging market currencies stabilise

Moves in the FX space were fairly disjointed, with no dominant theme in place. 

Moves in the emerging market currencies were perhaps the standout as recoveries in the Turkish lira and South African rand stole the show. Some stability in emerging markets is the kind of therapy markets want to see at the moment, and with Merkel saying Turkey’s talks to join the EU can proceed, this went a long way towards lifting sentiment.

The AUD remains one of the strongest currencies after having begun its ascent following the RBA statement yesterday. One of the easiest trades over the past few months has been to sell the AUD on strength as the RBA maintained an easing bias. However yesterday’s switch to a neutral bias resulted in a squeeze higher as short trades were taken out and speculative longs accumulated. Plenty of stops have also been taken out on the way up.

AUD/USD testing near-term resistance

The pair tested the 61.8% retracement (0.893) of the sharp drop from 14 January (above 0.90) to the end of January when it dipped below 0.87. This has encouraged some near-term profit taking early in Asia, but there is still a chance the pair could continue its squeeze into the 0.90 region. As it stands the pair has pulled backed into the 0.89 region where it had consolidated overnight.

The next key hurdle is Friday’s statement on monetary policy where we might see some revisions to inflation forecasts. Tomorrow we have retail sales, trade balance and NAB quarterly business confidence data due out. Any signs that the local economy is improving will only fan the AUD higher. Activity is also set to ramp up on the USD side of the equation with ADP non-farm employment change and the ISM non-manufacturing PMI due out. The ADP reading will help shape up expectations heading into Friday’s official print. Additionally there will be more Fedspeak with Tarullo and Plosser on the wires. Yesterday we heard from Lacker and Evans that the Fed may not back away from tapering. 

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