Market Analysis and Chart Review of AUDUSD

Market Overview

Yesterday, we took the rather complacent and easy view that a further rally in risk appetite in equity-land would see the old carry crosses rallying the most, but the action didn't hold up for very long at all. AUD, for example, did manage to hold the rally impulse into the strong US equity close, but it swooned again overnight after reaching strong new highs against the USD and the JPY. The other JPY crosses are also looking heavy as the Asian session draws to a close. The action in the USD was a weaker echo of what transpired in the JPY, as the USD fought back a bit again overnight.

The Japanese data out overnight was worse than expected, with a sharp downward adjustment in Q3 GDP. But look at the Machine Tool Orders data, which reflects orders for machines used to manufacture other goods. This measure registered a fall of over -60% on a year-on-year basis. This sector of the economy is the one that suffers the most in an economic downturn, and the contraction likely speaks of a dramatic slackening in demand both domestically and in China, the world's workshop. We are growing increasingly worried about the state of play in China, and we also question the accuracy of some of the data we are seeing. An article in Bloomberg this morning about the challenges facing the Chinese manufacturers contains a harrowing prediction by a "former trade official" that most small exporters could fail in the next three years. China's government has its work cut out for it.

Expected to cut 50 basis points

The Bank of Canada decision is up today, with the bank expected to cut 50 basis points to bring the rate to 1.75%. The data out of Canada has finally begun to consistently pick up the pace to the downside. The big boost in CAD yesterday was likely related to the US auto manufacturer bailout news (Canada exports large volumes of car parts to Detroit) and the rally in crude oil. The political situation looks dicey at best, and we have a hard time seeing much upside for the loonie here. We would prefer to look for signs of a reversal back higher, which start if the pair trades back above 1.2650 and are confirmed above 1.2800. The situation with the BCE takeover, and whether it will collapse, also has a bearing on CAD (a collapse of the deal negative for CAD). The deal is being called "all but dead", but last rights have not yet been given and activities to salvage the deal are ongoing, so we'd like to see that issue put to rest as well to aid the CAD. The status of the deal may be final by the end of this week.

Market Action

This market is having a very tough time telling a convincing story. The risk appetite crosses are limping into the European session today at close to final short term support levels in many cases. The US equity rally yesterday mostly occurred in the Asian session before the market even opened and was on very light volume, so we're not sure about the conviction out there - again - we believe much of the rally has more to do with a short squeeze on overexuberant short risk positions in the market as there is clearly nothing to get positive about out there. We'll watch the 1.4750 area in GBPUSD, the 1.2800 area in EURUSD, the 118.50 area in EURJPY and the 0.6440 area in AUDUSD as lines in the sand for the broader risk equation. Below these levels and we are likely to see a push back to the old lows, until then we're in a nominal, low-conviction rally stance.

Chart: AUDUSD

AUDUSD looked like it was trying to get something cooking yesterday, but it quickly ran into thin air after the close of the US equity session last night and erased much of the previous day's gains. This threatens the rally scenario without yet killing it... The 0.382 Fibo at 0.6540 is still in place - this was also a previous high. The last gasp support is down at 0.6440, which is close to the 0.618 Fibo of the recent rally and is also the pivot for the week.