Tuesday, February 4, 2014

Aussie dollar in change mode | US economic activity in January

The Reserve Bank of Australia (RBA) has decided to leave interest rates on hold but, significantly, it has abandoned its easing bias. Its latest commentary, released last night (GMT), made no mention of a need for the currency to be lower. It has signaled that an historically long period of interest rate stability is about to be extended further. At 2.5%, in Australia, interest rates are now historically very low.

The Aussie dollar has been falling against the US dollar for some time. There are now compelling reasons to believe that this situation has changed, or is about to change. The daily chart, above, shows a breakout from a very short sideways channel, lasting no longer than nine trading days or so, to the upside. Our sentiment, which has yet to be confirmed, has now changed from being bearish on this pair to being bullish.

US economic activity in January

The USA Institute of Supply Managers report on business in January, which came out yesterday, indicated that while economic activity continued to expand, it did not do so in the first month of 2014 at anything like the same rate as it ended 2013. This was a disappointment for the markets and had a detrimental effect on the US dollar, as might be expected. The report did, however, make many references to the severe weather conditions that have been affecting much of the United States, which slowed down manufacturing activity and the delivery of raw materials.

Purchasing managers who contributed to the report expressed optimism (hope?) that activity would increase again in the coming months.

From our perspective, if the severe weather affects manufacturing, it can also be expected to impact the all-important employment figures, which will be released in the form of the Non-Farm Payrolls report this coming Friday. Unfortunately, the markets do not seem to be able to recognise short-term distorting factors, such as severe weather, and react only to the raw numbers. Perhaps this is inevitable, but it does mean that traders will need to be careful out there.

The disappointing PMI report only served to accelerate the decline in equities. The USDJPY pair is a good barometer of how stocks are performing. Ultimately, we expect this pair to rise, but it seems there is not much prospect of this until the DOW and the S&P show signs that their punishment might be coming to an end. Hopefully, the further the Yen pair falls in the face of the equity correction, the further it will have to rise when it eventually starts to do so. In the meantime we are out of this pair.

USDCHF remains in an uptrend and Cable (GBPUSD) is doing very well for us to the downside.

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