After posting a new high for the year at 97.20, the USD Index finished last week .3% higher at 96.70.
However, two currency pairs that aren’t components of the USD Index, the AUD/USD and NZD/USD, both rose against the Greenback by .8% and 1.8%, respectfully.
Forex traders refer to these currencies as the Antipodeans since they are based in New Zealand and Australia. To some degree, they can also be classified as proxy trades to the Chinese Yuan, since both nations rely on large exports to China and tend to rise on good news out of China and vice versa.
It’s this Chinese aspect that has recently tempered the steady, eight month downtrend in both the AUD/USD and NZD/USD.
In an effort to shore up the Chinese economy and to avoid a hard economic landing, the Peoples Bank of China (PBoC) has created close to $700 billion in fiscal stimulus so far this year. This stimulus includes a $140 billion cash injection on January 23rd, which was the largest one-day reverse repo operation in the PBoC’s history.
And while it’s difficult to gauge just how much of last week’s bounce in the Antipodeans was PBoC driven, it is clear that this week’s data schedule will test the resolve of upside retracement and the near-term direction of both of these currencies.
Starting off tomorrow, the RBA will release the minutes of their latest policy meeting. And while we don’t expect any material surprises from the actual text, the confluence of opinions which resulted in RBA chief Phillip Lowe changing the central bank’s interest rate bias may be worth 20 ticks in the AUD/USD.
On Wednesday the data gets a sharper edge with the release of the Q4 Wage Price Index. This quarterly report on wage growth has not printed outside of a .4% to .6% range since May of 2014. This narrow range essentially defines the RBA’s repeated “slow growth” mantra and has kept overall inflation in the lower end of the RBA’s target band. A print outside of this range could triggered a 30 to 50 point move in the Aussie.
Across the Tasman, the Fonterra GDT Price Index will also be released and will reflect the results of recent NZ dairy auctions. This index has risen over 8% since November. With last week’s strong 1.8% rally in the NZD/USD, we expect a weaker number will have an asymmetrical impact on the Kiwi Dollar and likely push it back below .6800.
The most significant data point down under will be Thursday’s Australian employment report. Over the last 12 months, this data series has surprised the market in both directions and back-month data has usually significantly revised. The consensus forecast is for just over 15,000 new jobs, with the unemployment rate remaining steady at 5.0%.
Considering the RBA’s focus on employment growth leading to higher wages, we see increased volatility on both side of this data set. On balance, a stronger report would offer an easier short entry near .7200 and a weaker jobs number would see a return to the .7000 handle.
We are currently short AUD/USD at .7175. We suggest looking to add to short positions at .7215 with an initial target of .6930 and a .7280 stop.
The data calendar for the Eurozone is pretty light until Thursday’s EU PMI reports. Our trade suggestion to add to short positions at 1.1360 was not filled, which leaves us short from 1.1475. We suggest holding short from 1.1475 with an initial target of 1.1140 and a 1.1460 stop.
Stronger-than-expected Core machinery orders failed to boost the JPY in today’s Asian trade as the USD/JPY has started the week in a narrow 20 point range. We still prefer the short side of the pair from 110.40, or better, with an initial target of 107.60 and a 111.75 stop.
With no Brexit votes scheduled for this week, tomorrow’s UK employment report will be the key driver for the Sterling. Our trade suggestion to sell the GBP/USD at 1.2845 was filled. We suggest holding short from 1.2845, or better, with an initial target of 1.2615 and a 1.2985 stop.
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