Selloff in commodity currencies continued last week as Aussie and Canadian dollar tumbled broadly. New Zealand dollar, on the other hand, recovered after RBNZ's 25bps rate cut, which was less dovish that expected. Aussie was pressured as copper extended recent slide to the lowest level since 2009 on weak demand from China. Gold also suffered steep fall and reached as low as 1072.3, losing 1100 handle. Meanwhile, crude oil extended recent fall through 50 to as low as 47.72 before losing at 47.97. Dollar and Sterling pared back some of recent gains against Euro, which ended as the strongest major currencies last week. In other markets, DJIA suffered the worst week since January on mixed earnings and dimmed outlook of China's economy.
More in RBNZ in RBNZ Cut OCR To 3%, Suggesting More Easing To Come and China in China PMI Fell To Lowest Level In 15 Months.
Overall, in the currency markets, commodity currencies maintained near term bearishness against others. Dollar and sterling traders seemed to have lightened up their bets ahead of a key week. Both currencies remained the strongest major currencies this month as supported by rate views. FOMC this week will be the major focus. While there is no expectation of a change in policy this time, attention will be on any change in the statement that would hint on a September hike, which markets saw as having 50/50 chance. On Friday, Fed staff accidentally published a "confidential" document on Fed's website. In that document, it's projected there would be one rate hike before December. And as there would be post meeting press conference only in September and December, that makes a September hike more likely. But after all, dollar will need some affirmation from Fed regarding September hike to regather the momentum for another rise. The greenback will also face the test from Q2 GDP on Thursday.
Sterling, was boosted earlier this month by BoE governor Mark Carney's comment that rate hike could happen sooner than expected. Markets are currently pricing in a hike by next May, pulled ahead from August. The minutes for July meeting also showed debate on rate hike intensified. More in BOE Members Voted Unanimously To Keep Rate Unchanged On Greek Uncertainty, Split Expected In August. Sterling will look into Q2 GDP data to be released this week to draw some refreshed buying interest.
While we maintained our bullish view on dollar and sterling, we'd also like to point out the near term risk. Dollar index's rebound from 93.56 has been rather disappointing so far and momentum started to diminish last week. The index was bounded inside the near term rising change from 93.13. Price actions from 93.13 could indeed be a corrective move, which is the second leg of the whole correction pattern from 100.39. A break below 95.45 support will likely pave the way for a new low below 93.13. Nonetheless, a break above last week's high would likely mark an upside acceleration for 100.39 high. So, while we stay bullish on the index with 95,45 intact, confidence on this bullish view is not too high.
On the other hand, EUR/GBP's fall from 0.7482 has been rather unconvincing so far. The structure of such decline is clearly no impulsive which raised doubt on our bearish view for 76.4% retracement of 0.5680 to 0.9799 at 0.6652. Nonetheless, outlook is still bearish as long as 0.7223 resistance holds.
Regarding trading strategy, we're maintaining our view that commodity currencies will stay weak. Our AUD/USD short continues to perform well. We'll stay short for next long term fibonacci level at 0.7182. We might start to consider exiting the short position below there. Stop is now lowered to 0.7500. However, the dollar and sterling didn't build up bullish momentum as we anticipated. Indeed, we sold EUR/GBP at 0.7000 last week but was stopped out by the stronger than expected recovery. And at this point, we're not convinced by the strength in Euro yet. Hence, even though EUR/AUD and EUR/CAD both extended recent rise, we prefer not to chase these two rallies. Instead, we'll keep monitoring GBP/CAD for a dip to enter long. Ideal, the entry point would be between 1.95 and 2.00 with stop below 1.95. We're looking at targeting 161.8% projection of 1.7542 to 1.9556 from 1.8150 at 2.1408. Such an a trade is unlikely to be filled this week but we'll see.
