Archive
FXIB 2011 First Quarter Review and Market Outlook
Foreign Exchange Market
Since the start of the year, the US dollar has weakened considerably against the other major currencies with the Dollar Index declining from 80.85 to 76.84. The US Dollar performed the worst against the Euro, losing 6.56%. The US Dollar also lost 4.03% to the British Pound, while losing 1.02% to the Swiss Franc,. The US Dollar lost 2.14% to the Australian Dollar, and it lost 3.08% to the Canadian Dollar respectively. The only major currency the US Dollar ended the first quarter stronger against was the Japanese Yen which the USD gained 2.84%. We believe the primary reason for the US Dollar decline this quarter can be largely attributed to QE2 program which is injecting $3.4 billion excess dollars every business day into the market. In turn, these funds are then seeking out high yield or “risk assets” in foreign countries which drives the US Dollar lower. As of late, some of the most popular risk assets have been in Europe and Australia. We believe on fundamental level the Euro is severely overvalued considering that Ireland is still experiencing problems with their banking system and certain European countries interest rates spread (compared to German Bunds) continue to increase. A report was released last week that showed some Irish Banks require a total of $20 billion more in capital, which would bring the total amount to about $57 billion. The Irish government is in the process of shoring up its banking system with assistance from the ECB. Over the last month, we have been hearing more hawkish comments from the ECB about inflation and interest rate hikes. The ECB tends to pays more attention to headline inflation rather then core inflation. We feel that this is the wrong time for the ECB to be raising interest rates as it can compound Europe’s problems further due to the problems not being fully resolved at this time. Regardless, the market seems to be enjoying the more hawkish talk from the ECB by driving the Euro higher to a recent high of 1.4247 . We believe that the Euro is setting up a classic “buy the rumor, sell the fact” in regards to a ECB rate hike. There is no guarantee the ECB will hike rates and we believe cooler heads will prevail. As for the Australian Dollar, recent estimates show that the Australian dollar is overvalued by 30% on a PPP adjusted basis. The rise of the Australian Dollar has been very impressive considering all the bad weather over this quarter from excessive flooding, earthquake to a typhoon. The Australia government and RBA is predicting that the damage from the flooding will cost the economy $9billion and that in all the natural disasters will cut about .5% in GDP growth. Considering that Australia expanded 0.70 percent in the fourth quarter of 2010 over the previous quarter, we feel a .5% decline in GDP growth could push Australia into a recession. If this was to occur, we believe the RBA would lower interest rates and consequently weaken the Australian Dollar. It is interesting to note that the odds of an Australian rate cut now higher than a UK rate hike, with odds of a rate cut around 34% while previous odds were at 5%. Another currency pair that we are closely keeping an eye on is the Swiss Franc. Even though it ended the first quarter virtually unchanged against the USD, it seems that there is no limit to how far the Swiss Franc can strengthen. During the quarter, the Swiss franc strengthened as much as 4.63% to a new record low of .8907 but ended the quarter at .9188. The SNB has recently been commenting that the “strong Swiss franc and the weak global economy are urging the central bank to continue to stick to its cautious monetary policy”. We believe the primary driver behind the rise of the Swiss Franc over the past year is that the Swiss Franc is now viewed as a safe haven in a environment of European sovereign debt crisis and a uneven global recovery. The strong Swiss Franc is helping keep inflation under control but is negatively affecting Swiss exporters. The SNB believes that a strong global recovery and resolving Europe’s sovereign debt problem will make the Franc weaken and we are inclined to agree with them.
Commodities
Commodities saw their third consecutive quarterly gain as geopolitical risks stemming from unrest in North Africa and the Middle East drove energy prices higher. We also saw some unfortunate natural disasters strike the Asia-Pacific region in which commodity production will be reduced. In this process, all of the three major commodity indices outperformed the MSCI World stock index, which returned 4.3% for the quarter. Strongest was the S&P GSCI, with its heavy exposure to the energy sector, returning 11.6% while the DJ UBS, with its broader approach, returned 4.4%. In the middle we find the Reuters Jefferies CRB index coming in at 8% for the quarter. Gold finished slightly higher gaining .98%, the tenth quarterly rise in a row and the longest winning streak in more than three decades. Resistance is currently firm towards 1,450 as investors have been scaling back positions ahead of the possible cessation of quantitative easing in the U.S. and a return to normalized interest rates. This reduces the competitiveness of gold and silver being non interest bearing assets. Cotton, a market with rising demand from Asia and problematic supplies, was the big winner in the commodity arena posting gains of 38% for the first quarter. This is after coming off 2010, a year that saw cotton prices skyrocket by 90%. This market has rallied by more than 400% since 2008. Grain markets wound up with mixed results for the first quarter: wheat was down 4% while corn was up 10% and soybeans gained 1%.
Looking Ahead at the Second Quarter
Higher commodity prices and a weaker US Dollar is a good recipe for inflation, so we do expect core inflation to increase this quarter. Based on comments from the FOMC members over the last few weeks, we believe that the US Federal Reserve will end QE2 as planned in June of 2011. By our estimate Bullard, Fisher, Plosser, Lacker, and Kotcherlakota have all advocated that the US Federal Reserve start looking at an exit strategy, a “preemptive strike on inflation”. Some of the FOMC members have not only called for raising interest rates by end of 2011 but that the Federal Reserve also start draining excess liquidity from the market at the same time. We did get reports last week that the US Federal Reserve was testing its reverse repo liquidity drain facilities. The trouble that the US Federal Reserve now faces is when and how to start exiting from a very accommodating monetary policy without negatively affecting the US economy, but before the US is saddled severe inflation. On another positive note, the US economy added 429,000 jobs in the first quarter – which will allow the US to have a more sustainable recovery. Once QE2 ends: we believe that commodities, stocks and bonds will sell off while the US Dollar rallies. We do not foresee another Quantitative Easing program unless the US economy takes a turn for the worse.
What Does Europe’s Latest Stablity Pact Mean For the Euro?
What is in the agreement:
- Size of bailout fund raised to EUR 500 bln
- EFSF will be able to buy bonds directly from weak states
- There will be cash contributions to the fund rather than only debt guarantees
- Greek loan rates cut by 1%
They will ratify the pact at the summit scheduled in two weeks.
What is NOT in the agreement:
- An extension of bailout terms for Ireland since they refused to raise their corporate tax rate
- No agreement to buy the ECB’s portfolio of PIG bonds by the EFSF
On Friday we received reports that large US custody banks have been buying the Euro. EUR/USD has also pushed higher in early interbank trade, currently trading around 1.3960 compared with a NY close around 1.3900. We believe that with this new stability pact coupled with the ECB talk about rising interest rates will give Euro bulls more vigor to push the Euro higher. However with that being said, based on the latest COT report by the CFTC – open interest on the Euro reached 263,702 contracts which is the largest amount since June 08,2010 when the Euro was at 1.19, at which point the Euro then rallied to 1.3300 a few months later. Based on the COT report, and the new stability pact from the EU we believe that the Euro could rally to 1.4250 before selling off. The immediate area of resistance comes in around 1.4035, if that level breaks the next area of resistance does not come in till 1.4250.
GBP/USD Outlook for 2011
Before the Global Financial Crisis, EUR/GBP cross spent years trading between .65 and .70. Obviously much has changed since then but we at FXIB cannot see a good reason for the Euro, with all its Sovereign debt woes, to still be trading 20% higher against the GBP. In our opinion it’s only a matter of time before the cross falls to .75 at least. What does that mean for the other crosses? If EUR/USD falls to 1.20 and EUR/GBP falls to .75, then we are forecasting that cable will be trading at 1.60. If EUR/USD rises to 1.40 and the cross falls to .70, then we believe that GBP/USD will be trading at 2.00. These forecast are based on previous price action before the Great Financial Crisis hit.
01/13/2011 - Click-to-Enlarge
Taking a look at the GBP/USD Daily chart above, the white line is a 20 day Moving Average and is starting to turn up. The blue line is a 60 day Moving Average providing intermediate support. The green line is the 100 day Moving Average providing strong support at 1.5716. And of course the 200 day Moving Average is the purple line at 1.5423. We are looking to buy GBP/USD on dips toward the 200 day Moving Average. We believe that the UK government austerity programs will increase confidence in the GBP as the budget deficits are reduced and the economy manages to sustain growth. Only concern we have is that the Bank of England is not acting fast enough to control inflation right now, but as the BoE hikes interest rates to slow inflation this will support the GBP. We firmly believe that this year will be the year that makes or breaks the EU, unfortunately the longer the structural problems of the EU sovereign debt crisis remain unfixed, the higher likelihood we will see the EU collapse. Recent reports have indicated that if Spain needed to be bailed out that would be the catalyst for the EU breaking up. Given this backdrop, we foresee the GBP strengthening against the Euro and consequently against the US dollar.
The EU Breaking Up Is Not So Far Fetched As It Once Was
Over the last few weeks, we have been noticing that Europe is ever becoming more reluctant to fix the structural problems of their sovereign debt crisis. All Europe has been doing is putting band aids over a infection that has now turned into septicemia with no political will to come up with a cure. Reports have come to light that Germany has threatened to the leave the EU and most recently, Germany is refusing to expand the $750 billion bailout package. Bond yields on European debt slowly grind upward as US rating agencies continue to downgrade the credit worthiness of European countries. Debt levels among European countries has exploded, with some debt to GDP ratio levels at 125%. All the while, countries such as France and Germany have to borrow more to fund the bailouts of the smaller countries who buried themselves in debt. It is our opinion at FXIB that this is only transferring the debt crisis from one country to another country and forestalling the inevitable.
Structural Problems
The EU has a monetary union but lacks the fiscal union necessary to contain the debt crisis. The fundamental problem is that each European country issues its own bonds and has their own fiscal policy, but not able to devalue the currency. This leaves them susceptible to bond vigilantes and in a precarious position. European countries are now tasked with having to produce balance budgets, but not at the expense of hurting their economy and all the while maintaining massive social welfare programs. We don’t have to look far in history to see how this will end up. Looking at US history shows us that monetary unions do not work unless there is a fiscal union. It was 1787 in the US and the states were bankrupt, with out a strong central government, states were resorting to issuing their own currencies, and not coordinated at all in trade. Alexander Hamilton realized that the crisis had finally come to a point that the Articles of Confederation were deemed to be insufficient. The solution to the crisis was for the states to give up their sovereignty and to establish a more powerful central government that could tax, assume the debts of the states, issue a single currency, and issue bonds for the country as a whole. At the height of the crisis in 1787, John Jay wrote “that America had no sooner become independent than she became insolvent”. Now you might be wondering why Europe doesn’t do the same thing to fix their debt crisis. The difference is that Europe lacks the political will and fortitude to give up sovereignty, to form a central government that can tax and issue bonds for the EU as a whole. So we at FXIB believe only two outcomes exist at this point: Mostly likely outcome to happen is that the EU breaks up and reverts to 1999. The other outcome is that in the off chance Europe does get its act together and start working as a team to resolve their political differences, then we expect a government structure that is similar to the US which would support the Euro.
Why American Politicans Should Take Heed of EU Debt Crisis
Even though the US does not have the structural problems that the EU has, the debt load of the US is quickly reaching a point that is unhealthy for the economy and poses a threat to our economic security. Bond vigilantes will not be pre-occupied with Europe forever and once the EU debt crisis reaches a conclusion they will more then likely turn their attention to the US. We have already seen US yields sky rocket over the past two weeks, with the 10 year bond yield at 3.56% as the bond market prices in higher inflation and as the supply of bonds outstrips demand. We at FXIB are split on how high bond yields will go, but what is clear is that the Bond Bubble over the last few years has burst. Higher bond yields not only affect what kind of interest rate our government pays, but what kind of interest rate US citizens pay for mortgages, cars and loans. And this is why our politicians need to pay attention to what Europe is experiencing, because if our politicians continue to spend and bury us in debt we will quickly end up like Europe with our own sovereign debt crisis. For right now, the US is benefiting from the EU debt crisis with the US dollar gaining value against the Euro as more investors dump Euro assets and pile into US dollar assets.
How A EU Break Up Impacts Currency Traders and Investors
I’m sure we’ve all heard the motto: “Hope for the best, but prepare for the worst” this motto aptly reflects our outlook on the EU. For a currency traders and investors, these are very interesting times. You have the US Federal Reserve printing $80 billion more dollars a month which lowers the value of each dollar and dollar denominated assets, then you have the EU that appears to be on the verge of breaking up which is not providing any confidence in the Euro or Euro denominated assets. What is a investor or trader to do? Until the EU debt crisis gets resolved we at FXIB are reluctant to hold Euro’s in our investors portfolios, we feel that it presents too much of a unnecessary risk that we don’t want exposure to. As for investors who may hold European stocks or assets denominated in Euro’s, you can protect your self by using Euro currency futures to hedge against a declining Euro (of course this only works as long as the Euro remains solvent). In the unfortunate even that the EU does break up, we expect each European country to revert back to their own currency like it was in 1999. There will probably be a fixed exchange rate for awhile giving investors/traders who hold Euro’s or Euro denominated assets an opportunity to switch to the “new” currency.
Conclusion
Unless Europe works together to resolve their differences, we see the odds of a EU break up ever increasing. We will be paying close attention to reports over the next few weeks/months regarding the EU and debt crisis. And we hope that our politicians wake up and smell the roses so we don’t end up like Europe.
US Dollar Shorts Take Cover
110/19/10 - Click to Enlarge
The tide could be turning on US dollar pairs. This morning we saw a lot of dollar shorts liquidating their trades, and as such we could be entering a new trend in which we see the dollar rally further.
Trading Outlook
EUR/USD: a close below 1.3770 would probably open the way to 1.3650.
AUD/USD: a close below .9750 and we could see .9570. Also, we still have a sizable gap on AUD that has yet to be filled down around .9280. We could possibly see that gap get filled over the new few weeks.
If any of these levels break, I’d look to sell rallies.
Gold selling off is another confirmation in our analysis that we could be entering a new trend. We believe that QE2 is fully priced into the markets. At this point, it’s just a matter of how much we get. We think anything less then $500 billion will be dollar bullish considering that most of the articles we’ve been reading, people have been talking about $1 trillion for QE2. The Fed earlier today hinted at $100 billion a month in QE ( provided no timetable though). Secretary of the Treasury comments yesterday also may be making dollar shorts a little nervous because Timothy said “that the US can not devalue its way to prosperity” (finally someone has some common sense). However, the mixed signals from the Treasury and the Fed is creating some confusion among traders. We expect volatility to increase this week due to the mixed signals and will keep an eye on the Federal Reserve statements for any change in policy.
FXIBonline Third Quarter Report 2010
In the third quarter we saw the dollar sell off across the board, due to the Federal Reserve board being bearish on the US economy and considering more Quantitative Easing towards the end of the year if need be. We do not foresee the Fed needing to institute more QE because we believe this summer was a soft patch in the economic recovery and will strengthen going into the fourth quarter. The US dollar has recently declined to a six month low against the Euro, the stronger Euro is already negatively impacting smaller European counties such as Greece and Ireland that actually need the Euro to depreciate to remain competitive and finance their debt. It is also interesting to note that US dollar shorts have hit a high not seen since mid-2008. In mid-2008, the EUR/USD was trading at 1.60 and eventually sold off to 1.23 as traders and asset managers reduced their dollar short positions. A benefit of the weaker dollar is it will help our exports creating a positive impact on our economic recovery. The weaker dollar will act as a mini “stimulus” and should help the manufacturing sector which has been leading the recovery. A recent report by Bloomberg utilizing a purchasing power basis estimated that the Australian dollar was overvalued by as much as 67%. Not only does a strong Australian Dollar have a negative impact on the Australian economy, but it means that at some point Australia will need to take steps to curb the strength of their currency to prevent deflation.
Commodities
This past quarter we saw commodities prices at record highs. Wheat hit 815.50 a bushel and currently is trading around 700, up almost 67 percent from its low in early June of 474. Corn hit a high of 536 from its yearly low of around 356 also established in June. This price action was prevalent throughout the commodity sector during the third quarter, including gold and silver which are enjoying all time highs. What is causing this? Russia was an unfortunate recipient of poor weather this year resulting in damaged crops with the consequence being a cap on their commodities exports. Australia has also struggled with production given their weather patterns however, the U.S. has managed to remain fairly consistent because of our technological advances such as irrigation and types of seed. One exception to this quarter’s commodity rally is oil. Oil has not enjoyed this surge in pricing primarily due to the underlying economic factors surround global expansion. Not even the massive oil leak in the Gulf of Mexico was able to push prices significantly higher. These kind of price increases remain unsustainable in the short term given that the US still has a 9.5% unemployment rate. Many market participants including us at FXIB compare this current situation to that of oil in the summer of 2007. When prices of commodities rise this high this fast the shock to the global system hits in waves, these waves cause mini bubbles in prices not only for food producers and consumers but in how banks structure loans and lines of credit based on overcapitalized hard assets. As a result of these bubbles when markets do re-align themselves, (and they will as we saw with oil) you are left with over priced bonds, loans and market valuations that will not be able to be sustained at these historical price levels. What does this mean for the average investor? Be careful buying commodities or commodity tied investments at these prices. Based on our research, gold is not an effective hedge against inflation, but is rather more effective as a hedge against the debasing of the US dollar. If the US Federal Reserve does start more Quantitative Easing, commodities could rally further however, we do not believe the Fed will need to do another round of Quantitative Easing.
Fourth Quarter Outlook
Given this backdrop, we expect commodities and commodity related investments to sell off in the fourth quarter and possibly into the first quarter of next year. We expect the US dollar to recovery some if not all of its recent losses and will keep a close eye on the US Federal Reserve statements as to any clues or direction they may take in regards to Quantitative Easing. We are also keeping an eye on the Chinese Currency Bill that just recently passed the US House of Representatives. The bill labels China as a currency manipulator and gives US companies the ability to levy charges on Chinese imports. If this bill is signed into law, we should see AUD/USD sell off as a proxy for the USD/CNY exchange rate. This bill is the toughest response by the US in regards to China’s polices. A currency war is already raging behind the scenes in which each country is trying to devalue their currency to stimulate economic growth. (what we call a race to the bottom). We do expect volatility to remain about the same, and we will continue to keep on eye on the leading economic indicators for the US economy.
US Dollar Shorts Hit High Established in Mid-2008
In mid 2008, EUR/USD was trading at 1.60. When the trend changed (traders reducing shorts), it fell to 1.23. We firmly believe the fundamentals of Europe do not support the EUR/USD to be at 1.38. Primarily because Europe still has a debt crisis and the stronger Eur0 is starting to affect smaller countries like Greece and Ireland which need to actually have the Euro depreciate to be more competitive.
Even though EUR/USD is not trading at 1.60, it is interesting that not only are we approaching previous resistance at 1.3810 but that dollar shorts have reached a high. Given that the US dollar has sold off across the board over the past few weeks, I think we could see the US Dollar rally if EUR/USD is unable to put in a meaningful close above 1.3810 next week. We will be keeping an eye on any Fed statements as to if or when they will start QE. If they do, then we could see the US dollar slide further.
This Week in Review 09/19/10 – 09/24/10
This week we saw the dollar sell off across the board, primarily due to the Fed’s statement that they could start up the printing presses towards end of the year to boost the recovery. We do believe that the market over-reacted to the statement since the Fed only said it was an option available and they had not yet reached a final conclusion on more QE. The one benefit of a weak dollar is that it makes our goods cheaper overseas and will help our economic recovery, kind of a mini stimulus itself. Eventually countries that export to the US will need to weaken their currencies to prevent growth from stagnating or creating deflation, so we do foresee currencies like AUD, EUR, CAD, and JPY weakening towards end of the year.
EUR/USD – This week the pair rallied strongly overcoming resistance at 1.3310 and closing at its highs up at 1.3490. At this point, we do not see resistance till 1.3810. Support lies down around 1.3300 on any pull backs.
GBP/USD – This pair had another good week and finally managed to break out of its range bound trading zone for the last few weeks. Next resistance lies up at 1.60 and support lies down around 1.5675.
USD/CHF – This pair had another bad week that saw it slide as low as .9779, but closes at .9836. The all time low for USD/CHF was established during the GFC (Global Financial Crisis) in which it fell to .9636. At this time we are continuing to buy USD/CHF on dips as we expect a strong short covering rally once a bottom is put in place.
USD/JPY – This week the pair gave back all of its gains from last week. It almost closes at the level where BoJ intervened last week. It closes at 84.20 from opening at a high of 85.80. It seems that the BoJ intervention from last week was largely unsuccessfully. We feel that the USD/JPY is too low to comfortably short it, but at the same time we don’t want to go long cause we do not know when this pair will finally bottom out.
AUD/USD – For the second week in a row this pair has had another solid performance against the USD. It overcame .9410 resistance early in the week and closes near its high at .9591. The all time record high for AUD/USD is at .9849 and if it manages to break .9600 then we could see .9800. Support lies at .9385 for pullbacks.
USD/CAD – This pair did not benefit as much from the weaker dollar like AUD did, however it still ends marginally lower then it opened. It closes this week at 1.0243. China was a stronger buyer down around 1.0220 earlier this week limiting the Canadian dollar gains. USD/CAD still remains range bound between 1.0100 and 1.0650. Resistance lies up at 1.0385 and support down around 1.0180.
NZD/USD – This pair did rally along with AUD, but gains were muted. It closes the week at .7340. Resistance lies up at .7420 and support lies down around .7250.
Update on Forex Inter-Market Correlations
As the third quarter comes to a close, it’s necessary for us to update our correlations for each currency pair that we trade. This is a integral part of how we manage each investors portfolio to balance the account’s exposure. Utilizing correlations to trade the forex is a complicated trading strategy and correlations can and do break down over time. For our analysis here, we will only examine the major currencies that we trade.
Currency Cross Correlations: (all correlations calculated with a three month time frame) To eliminate redundancies we have only done one currency cross correlation analysis. (ie: the correlation between EUR/USD vs GBP/USD and GBP/USD vs EUR/USD is the same.)
EURO Crosses
EUR/USD vs USD/CHF- Correlation is -.83. This is a little weaker then expected, but they still have a strong negative correlation. This correlation is the most easiest for new traders to pick up on due to its consistency.
EUR/USD vs GBP/USD – Correlation is +.91. Out of all the major currency pairs, this is the strongest correlation for EUR/USD. This a stronger correlation then we expected.
EUR/USD vs AUD/USD – Correlation is +.85
EUR/USD vs NZD/USD – Correlation is +.86
EUR/USD vs USD/CAD – Correlation is -.42
EUR/USD vs USD/JPY – Correlation is -.77
AUD Crosses
AUD/USD vs USD/CHF – Correlation is -.86
AUD/USD vs USD/CAD – Correlation is -.57. This is a little weaker then expected, but still shows that as AUD/USD goes up, USD/CAD has a high probability that it will go down.
AUD/USD vs NZD/USD – Correlation is +.91. This is the strongest correlation for AUD/USD out of all the other major pairs. This strong correlation does fall under our expectations, and probably the second easiest correlation for new traders to pick up on.
AUD/USD vs GBP/USD – Correlation is +.84
AUD/USD vs USD/JPY – Correlation is -.80
CHF Crosses
USD/CHF vs NZD/USD – Correlation is -.81
USD/CHF vs USD/CAD – Correlation is +.22
USD/CHF vs GBP/USD – Correlation is -.88
USD/CHF vs USD/JPY – Correlations is +.93. This has surprised us greatly given that historically these two currency crosses do not have a strong correlation. This correlation is the strongest for the CHF and JPY crosses.
CAD Crosses
USD/CAD vs USD/JPY – Correlation is +.07, we were surprised to find that this comparison has the lowest correlation of all the pairs.
USD/CAD vs GBP/USD – Correlation is -.38
USD/CAD vs NZD/USD – Correlation is -.68
JPY Crosses
USD/JPY vs GBP/USD – Correlation is -.85
USD/JPY vs NZD/USD – Correlation is -.68
NZD Crosses
NZD/USD vs GBP/USD – Correlation is +.84
Federal Reserve Sets the Stage for Possible QE2 at End of Year
The FOMC “will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate”. This statement released earlier today from The Fed is what made traders dump dollars and pile into other currencies across the board. Traders and investors fear that The Fed could devalue the dollar with another round of Quantitative Easing, or to put it more bluntly The Fed is saying they could start up the printing presses and print a ton more dollars to buy anything from treasury bonds to Mortgage Backed Securities. As much as I would hate to see the value of my money decline in my pocket as a consumer, The Fed is tasked with supporting the economy through any means necessary.
Forex Market Highlights; 09/21/2010:
EUR/USD – Already well supported in anticipation of a dovish Fed, roared higher as the FOMC indicated its stands ready to loosen monetary policy further in the months ahead, if needed. The market stuttered for a moment, testing intraday support at 1.3105 before rallying to a fresh high of 1.3288 before Chinese offers finally made themselves apparent. On the post-FOMC rally we overcame the 76.4% retracement of the 1.3334/1.2588 drop at 1.3158 and broke through the 200-day average at 1.3220.
AUD/USD – Was a star performer today, rising above .9500 this morning, triggering a barrier option before consolidating around 0.9475 ahead of the Fed. There was no holding it back after the FOMC statement. AUD and gold both took off like they were fired from a slingshot. AUD reached 0.9564 and spot gold reached $1290.
USD/CAD – The Canadian dollar fared less well then the AUD and had a roller coaster of a ride after the FOMC statement. USD/CAD initially rallied to 1.0335 but eventually sold off to 1.0215 where Chinese buying of USD/CAD ahead of rumored 1.02 barriers turned that pair higher to 1.0270.
The FOMC statement was more bearish then we anticipated, but we do think that the market overreacted to the FOMC statement as we do not actually foresee the Fed having to resort to more QE to support the economy. We believe that this summer the economy hit a soft patch, and the recovery will strengthen towards end of year. We will be paying close attention to any unemployment data over the next few weeks as well as leading economic indicators. If the US starts showing signs of a stronger recovery, then we could see traders and investors go back to US dollars.
Fxibonline's Blog 