Shaun Downey is Chief Market Analyst at Currensee.
This week has seen a variety of major macro economic numbers that highlight starkly how the world is recovering in a two paced manor. Not surprisingly the East is powering ahead, with China needing to actually cool activity. Mondays release of the import export numbers suggest that whilst the export surge was probably at the expense of other countries, there is no denying the rise in imports. Australia is an obvious beneficiary and last nights strong unemployment numbers, which had been preceded the night before by the private survey of hiring numbers (a good lead indicator of the main report) saw the Aussie rally strongly. This, in combination with Rio Tinto posting its largest 4th quarter production of Iron ore, tells a story of relatively strong growth, and brings forward interest rate hike expectations.
In contrast the Beige book, whilst showing an improving economy, it remains a jobless one, with rate hikes still some way off. In Japan, it should be clear to the new Finance Minister that there is a need for either large scale Jgb purchases or an attempt to weaken the Yen to aid growth and stop the deflationary spiral.
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In Europe, problems with Greece persist as the Prime Minster ruled out an exit from the Euro and a bail out from the IMF, which leaves little but default, or a massive retraction in public spending, (politically difficult as the riots showed last year). However, the preliminary GDP numbers from Germany yesterday questions whether the economy maintained positive growth in the 4th Quarter. Could the Euro zone be slipping back towards a double dip?
For Sterling, this weeks rise came due the Mpc member Andrew Sentence, which heightened rate rise expectations, but its worth noting he was the man who was a persistent hawk when the Credit crunch broke, and even many months later, talked about inflation and wage price spirals. With an election looming and many headwinds in the UK economy, it’s hard to see Sterling rallying strongly, especially against the crosses.
So where to the opportunities lie? With the U.S and Europe still much in the same mire, it is difficult to see which currency will manage a sustained trend against another. Technically the Eurodollar has moved above the key level of 1.4515 mentioned in the last communiqué, but its lack of acceleration is a concern. The real opportunities therefore appear with the Australian Dollar against a variety of currencies.
Against the U.S. Dollar it is sitting at the top of the trend so any weekly break to new highs leaves little in the way of resistance all the way to Par. However, with Dollar Yen also in a medium term uptrend whilst above 0.9066, the Aussie Yen is a play that can take double benefit. This week saw the S&P hold key support at 1131 to 28 twice, and whilst this zone holds, it should prevent the normal correlation of the cross showing weakness and a subsequent break of its long standing uptrend. Good support is at 0.8390 and held on the dip yesterday. With the speed of the fall during the credit crunch, it means resistance is light on the way back up (in what I call vacuum down, vacuum up type behaviour), with progress only likely to slow when above 0.9316 on its way to a long term target of 0.9656 to 0.9707. Any failure in the Eurodollar also opens up possibilities in the Euro Aussie.