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Commodity Currencies Race To The Bottom

Published 09/24/2014, 06:26 AM
Updated 03/19/2019, 04:00 AM
  • More downside risk for commodity currencies
  • RBA speech expected to address housing market imbalances
  • JPY rally loses steam in light of risk appetite, Abe comments

The weaker commodity currencies are the most salient node of activity in this market, as AUD and especially CAD and NZD weakened sharply again yesterday after a feeble rally attempt. NZDUSD even managed to touch a new low for the year near the 0.8050 area, and a follow-through lower could set up a test of prior sub-0.7700 lows.

The focus on commodity currency weakness is still relatively new, as the market was previously distracted by the weak euro and the carry trade implications of European Central Bank policy easing, which meant a build-up of euro-funded carry trades against AUD and NZD in particular. This means that there is further room for these currencies to move to the downside versus the broader market, as speculative positioning was caught on the wrong foot.
EURAUD
AUD and the other commodity currencies have weakened against the broader market and there may be plenty more upside to a pair like EURAUD if the recent weakness in risk appetite continues, as this would likely see a further unwind of euro-funded carry trades.
Today’s German Ifo survey is the next test for this pair, followed by tonight’s speech from Reserve Bank of Australia governor Glenn Stevens (more on that below). Note that the 1.4570 area has been an important one stretching back to May of this year, while the 20-day moving average is sliding towards 1.4750.
EURAUDLooking ahead
The RBA’s Stevens will be speaking in Australia overnight. There is some anticipation that the RBA could move more aggressively on macro-prudential regulation to stem the excesses of the housing bubble in Australia, and this speech could see some of that anticipation fleshed out.
Overnight, an RBA semi-annual financial stability review complained that the Australian housing and mortgage markets are becoming “unbalanced”. As I wrote recently, there is considerable focus on Australia’s financial sector at the moment, and the big Australian banks had another ugly session overnight (though this could easily merely be contagion from a weak session in New York yesterday).
The general focus on weak commodity prices is also a factor working against the commodity currencies’ favour, particularly exposure to a China that is trying to shift its priorities away from mindless infrastructure and property construction expansion.
JPY crosses snapped back yesterday after a dip through important near-term support levels in the likes of USDJPY and EURJPY, but the rally lost its verve in the face of weakening risk appetite and Japanese prime minister Shinzo Abe commenting overnight that he would carefully watch how the weaker JPY was impacting regional economies.
So it feels like direction remains uncertain there after EURJPY pushed back toward yesterday’s lows overnight. If USDJPY can’t snap back higher above the day’s pivot (around 108.70), we may be looking at a correction to lower consolidation targets at 107.50, or even 106.40 in the event that asset markets remain in downbeat mood.
EURUSD
An interesting bearish reversal candlestick yesterday. Does this set in motion the much-anticipated test of the key 1.2750 area range support from 2013? EURUSDUpcoming Economic Calendar Highlights (all times GMT)

  • Germany September IFO Business Climate Survey (0800)
  • US August New Home Sales (1400)
  • US Fed’s Mester (voting FOMC member) to speak (1615)
  • Australia RBA’s Stevens to speak (0230)


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