Aussie Drops To 5 Month Low Below 0.92

The major movement in the currency markets on Tuesday occurred in the AUD/USD. The early morning news regarding domestic business confidence levels dropping for the first time in 5 months clearly weighed on investors’ minds as the day progressed with the Aussie declining by 80 pips, before concluding trading at 0.9201.

For those curious regarding why declining business confidence might lead to AUD/USD selling, the Australian economy remains under pressure to move away from mining investment and transition towards domestic consumption. The Reserve Bank of Australia (RBA) reminded us as recently as last week that an overvalued currency was hindering Australia’s transition away from reliance on mining investment. A weaker Aussie might help domestic business confidence levels improve.

Overnight, the Aussie slipped further to be below 0.92 for the first time since late March and is currently trading at 0.9163 at the time of writing. Additionally, the Westpac Consumer Confidence for September unexpectedly dropped 4.6%, showing some correlation between 12-year high unemployment and a consequent decline in consumer confidence. A collaboration between high unemployment alongside a reduction in both consumer and business confidence levels does not reflect positively on an economy entering the final quarter of the year and already expecting a decline in mining investment. If economic sentiment with Australia continues to worsen, a bearish cloud could be set to overshadow the Aussie.

Meanwhile, Bank of England (BoE) Governor Carney yesterday saw an opportune time to pause the rapid Cable decline by dropping a clear hint that the first interest rate hike will occur in spring 2015. As this is still a considerable distance away, the comments hardly encouraged a bullish reversal for the GBP/USD. However, it did stall the aggressive selling period we have observed as the Scotland independence referendum edges closer. The GBP/USD moved as high as 1.6159 on Carney’s comments, after recording its lowest value since November 2013 earlier (1.6058) on Tuesday.

Today, Carney and three members of the Monetary Policy Committee (MPC) are scheduled to provide testimony on the August Inflation Report. A repeat of Carney’s comments from yesterday that the first interest rate hike will be scheduled for around spring 2015, should lead to the GBP/USD entering a consolidation phase.

In regards to the EUR/USD, after reaching a fresh yearly low (1.2858) on the announcement that EU member states have formally adapted new sanctions on Russia the pair bounced back slightly and concluded trading at 1.2956. There is low risk economic data scheduled from both the EU and US on Wednesday. However, a scheduled speech from former Federal Reserve Chairman, Ben Bernanke over the next couple of days will be interesting to monitor. Although he has now stepped away from his role, potential comments from Bernanke regarding the US economy still has the ability to impact the Dollar.

In the meantime, the EUR/USD does appear to have found resistance located at 1.2960, suggesting that a move upwards towards 1.30 will be difficult for the time being. To surpass 1.2960, data from Germany on Thursday indicating that the EU’s largest GDP contributor is returning to form after hitting a unexpected rough patch is likely required.

Finally, the USD/JPY bull run continued with the pair advancing as high as 106.465. Comments from Koichi Hamada, an advisor to Prime Minister Shinzo Abe, that a weak yen is “positive for Japan’s economy” and more stimulus from the Bank of Japan (BoJ) will be required if Japan raises the sales tax again next year, has moved investors to price in further action from the BoJ.

At the time of writing the pair has advanced to a fresh 6-year high (106.644) and this upward move seems likely to continue as long as the markets continue pricing in future JPY weakness.

The next major psychological resistance level for the pair (107.210) can be found on the weekly timeframe (first week of April 2005 opening price). Although I am expecting the pair to challenge the area soon, the likelihood of a Friday morning speech from BoJ Governor Kuroda expressing that the monetary goals remain in reach will likely result in the pair struggling to surpass 107.210 for now.


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