Morning Fundamentals: Aussie Plunges, US Dollar Surges

The Australian dollar plunged below parity on Friday night, falling to a nine month low, to trade as low as 0.9960, before a late rally saw it close the week just above parity. The move came as the U.S. dollar surged over the past week, recording the largest two day rally in almost a year. The move was also exacerbated by the move from the Reserve Bank of Australia to reduce its official cash rate to a record low of 2.75%. Governor Stevens had said that one of the reasons for the interest rate cut was the strength of the local currency. Also impacting on sentiment towards the dollar were rumours earlier in the week that George Soros had place big bets on a fall in the Aussie. The local unit opens the morning at 1.0010.

The slump in the Japanese Yen looks set to continue as the Group of Seven Finance Ministers indicate acceptance of the currency's decline as they intensify their focus on Japan's strategy for economic recovery. As the U.S. dollar surged past 100 yen for the first time since 2009. Wolfgang Schaeuble, German Finance Minister, said of the summit in the U.K., “We had a very intense discussion about Japan with our Japanese colleagues.” The meeting took place as signs are once again pointing to weakness in both Europe and the United States. Bank of Japan Governor Haruhiko Kuroda once again stated that his economic stimulus programme of bond purchases is aimed at targeting 2% inflation by 2015 and not aimed at exchange rate moves to benefit Japanese exporters. USDJPY opens the morning at 101.80.

U.S equity markets continue to trade at new all time record highs as indications of strength in the U.S. economy bolster investor confidence. U.S. treasury yields surged as precious metals slumped while the S&P 500 extended its weekly gain to 1.2% and recorded a record for the sixth time in seven days. The surge in equity markets was aided by the fall in job-less claims to a five year low. The U.S. dollar surged against all of its trading counterparts. The S&P 500 closed the Fri-day session higher by 0.43% to close at 1,633.70. Earlier in Europe, bourses were marginally higher with the DAX ris-ing 0.19% while the FTSE gained 0.49%.


EUR/USD continued the fall after the expected pause during the Asia session as the local markets were a little concerned about the next move. The European morning started with some downbeat German Trade Numbers and Italian Industrial Production, with this being enough to start the weakness rolling with the price breaking 1.3000. Bears didn’t get carried away with the price chopping around the handle until the well into the US morning. Once rumours started with the WSJ article the heavy selling returned as the price was quickly offered to 1.2935. However, the over extended decline quickly snapped back to 1.2985 to close out the week. The article was released after the close and had Euro opening Monday slightly lower at 1.2975. Euro group meetings and no local data should see European markets remain on edge during their day and we would expect more weakness on the back of last Friday’s events. A drive towards 1.2900 looks likely over the next 24 hours.

Compass Direction
Short-Term Medium-Term
NEUTRAL BEARISH
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AUD/USD as expected didn’t do too much over the Asia session as the market took the wait and see approach on a Friday. The RBA Monetary Policy Statement saw some weakness but nothing was really there to drive the bears or take out the remaining bulls. However, once the European traders walked in AUD was walked down to 1.0025 support before finding another round of protective buying but as rumours started that the WSJ was about to print an article about the Fed cutting back QE the USD strengthened across the board. AUD hit a NY session low of 0.9961 but as expected snapped back to above parity to close out the week. AUD has opened right one parity after the WSJ article was released after the close on Friday but hasn’t really provided much punch. Australian Home Loans data is the local highlight with China also having Fixed Asset Investment. Will either save the AUD from its downward spiral? Homes are meant to improve but momentum is building to the downside and its going to be hard to turn but after months of being steady is it going to collapse we think not.

Compass Direction
Short-Term Medium-Term
NEUTRAL BEARISH
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