Dollar Recovers Mildly As Focus Turns To Consumer Confidence

The dollar is recovering mildly as markets are returning from extended holiday weekends. The EUR/USD is back, pressing the 1.29 level while the USD/JPY is trading above 101. Asian equities are nearly flat, with Nikkei recovering from earlier loss. This recovery sends yen crosses mildly higher. Today’s economic calendar is rather light, with main focus on the conference board consumer confidence from which is expected to improve to 69.8 in May. Strong equities performance and the improving U.S. labor market should give sentiments a lift. Attention would be whether the consumer confidence data would surprise the markets on the upside - and in particular, if it would take out the 73.1 cyclic peak made last November. In that case, we are likely to see a surge in dollar against commodity currencies. As major pairs and crosses are stuck in range for the moment, more consolidative trading is likely.

The Aussie and Kiwi are the weakest currencies so far for this month, with the AUD/USD down -7.77% and NZD/USD down -5.97%. The speculation of the Fed's tapering of the quantitative easing program was a driving force behind the move. Note that the EUR/AUD also jumped 5.34% so far this month, while the EUR/NZD is up 3.74%. The GBP/AUD is up 4.5% while GBP/NZD is up 2.9%. We'd like to reiterate that there were funds flowing back into major equity markets, from bonds as well as high yield currencies. While equities had a sharp pull back last week, there is no indication of a trend change so far. We expect commodity currencies to extend the recent decline later as stock market up trend resumes.

Looking at the NZD/USD’s recent development, sustained trading below 55 weeks EMA should confirm that medium term rebound from 0.7457 has already finished at 0.8675. More importantly, the corrective pattern from 0.7370 should also finish with three waves to 0.8675. Such a rise from 0.7370 to 0.8675 is viewed as the second leg of the correction from 0.8842. A fall from 0.8675 is seen as the third leg. The outlook is now cautiously bearish for 0.7475. A break there will send the NZD/USD through 0.7373 to 100% projection of 0.8842 to 0.7370 from 0.8675 at 0.7203, and below in medium term.

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Meanwhile, the Aussie's outlook is even worse taking the AUD/NZD into consideration. The pair had been in steady medium term down trend, and reached as low as 1.1890 last week. The outlook stays bearish, and we'd expect the whole decline from 1.3793 to continue to 61.8% retracement of 1.0628 to 1.3793 at 1.1837 and below. Based on the current momentum, the AUD/NZD would drop further to 76.4% retracement at 1.1375 before making a bottom. The outlook will stay bearish as long as 1.2166 resistance holds.
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