- AUD, best performer among G10 as USD loses ground
- We believe USD rally has reached an inflexion point as enthusiasm which followed Trump’s election begins to fade
- JPY may further weaken as BoJ has proven unable to drive inflation to the upside
- EURUSD: We expect a consolidation period as dollar rally runs out of steam
- EM currencies: We remain cautious as market not ready to make full switch to risk on mode
The Australian dollar was the best performer amongst the G10 complex as the US dollar gave back most of yesterday’s gains. AUD/USD opened at 0.7410 in Tokyo this morning and quickly moved towards the 0.7489 level (Fibonacci 38.2% on November’s debasement). If broken, the next resistance can be found at 0.7545 (Fibo 50%). According to the trading of federal funds futures, there is now a 100% chance that the Federal Reserve will increase its target range to 0.5% to 0.75% at its next meeting on December 13th-14th. Separately, we believe that the dollar rally has reached an inflexion point as the enthusiasm that followed Trump's election has already begun to subside.
The Japanese yen was set to end up the Asian session wearing red amid disappointing inflation figures, but it quickly recovered in the late session as European traders arrived at their desks. USD/JPY rose to 113.90, the highest level since March 15th, before easing to 112.84. Inflationary pressure increased slightly in October with the headline gauge printing at 0.1%y/y versus 0.0% median forecast and -0.5% previous reading, while the measure excluding food and energy edged up 0.2%y/y, beating consensus of 0.1% and a flat reading in September. All in all, the big picture has not changed as the BoJ has proven unable to drive inflation to the upside, which has been seriously damaging its credibility over the last few months. On the upside, the main resistance stands at 114.87, while on the downside a weak resistance area lies at around 109-110 (previous low and Fibonacci 38.2% on November rally).
EUR/USD was also better bid on Friday with the pair returning to 1.0608. The euro’s gains were more modest as the market expects the European Central Bank to extend/increase its quantitative programme soon. The pair has been unable to break the resistance implied by the low from December last year (1.0524) and bounced back to 1.0591 this morning. We expect at least a period of consolidation, if not of correction, as the dollar rally is running out of steam. However, we remain cautious with respect to emerging market currencies as the market is not ready to completely switch to risk-on mode.
Today traders will be watching GDP, exports, imports and business investment from the United Kingdom; retail sales from Italy; tax collection and central government budget balance from Brazil; wholesale inventories and Markit’s PMI from the US.