Australian Dollar Still Finding Bids Despite Softer GDP; What Gives?

Although the Australian Dollar has come off in Wednesday trade following the release of the weaker than expected GDP data, we do not feel the currency has come off nearly as much as it should in light of this development. Instead, the single currency is only mildly offered on a relative basis to this point, with the stronger China PMI data seen as the offsetting prop against any setbacks. Given the strong dependence of the Australian economy on China, any strength in Chinese economic data is perceived to be a net positive for Australia. However, ironically, the stronger China data may only serve to ultimately weigh on the Australian economy some more, with China in the process of aggressively looking to raise rates in an effort to curb inflation.

Meanwhile, at the same time, RBA Stevens has adopted a more dovish outlook on the local economy and has signaled an end to additional tightening for the time being. To us, this is a recipe for a good deal of relative weakness in the Australian Dollar going forward, and we like playing the anticipated weakness through the Euro with the Eur/Aud cross highly oversold on a longer-term basis and looking du for a sizeable bounce over the coming weeks and months. As such, we have recommended a fresh long position in EUR/AUD at 1.3580 with an open objective and stop-loss only if the market puts in a daily close below 1.3450.

Elsewhere, the Greenback remains very well bid cross the board but also looks to be overbought on the daily charts and could be poised for a pullback over the coming sessions. The break below 1.3000 in Eur/Usd has left the daily RSI below 30 and we would not at all be surprised to see a bounce of a couple hundred points to allow for studies to unwind so that the market can seek out a fresh lower top ahead of an eventual bearish resumption. In our opinion, given that the Euro has been the most beaten down currency in recent days, it stands to benefit the most should the markets begin to reverse course on Wednesday and Thursday.

Nevertheless, risk aversion and market uncertainty are still running quite high and the news of S&P placing Portugal on credit watch with warnings of a potential downgrade to foreign and local currency sovereign credit ratings has not helped matters. The Swiss Franc has been another prime beneficiary of the latest wave of safe haven buying, with the Eur/Chf cross plummeting below 1.3000 on Tuesday. But here too we see the market well overdone and very much due for a necessary upside reversal. We have established a long position on this cross by 1.2995 on Tuesday and are optimistic with the prospects for a bounce over the coming sessions.

Looking ahead, UK Nationwide house prices and German retail sales are due at 7:00GMT, with Swiss SVME PMI shortly after at 8:30GMT. German manufacturing PMI is then out at 8:55GMT, with Eurozone manufacturing PMI immediately following at 9:00GMT. UK manufacturing PMI then rounds things out for European trade at 9:30GMT. US equity futures and commodity prices are tracking moderately higher on the day thus far.

Written by Joel Kruger, Technical Currency Strategist

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