DailyFX

Short Covering Seen in AUD and NZD; EUR/JPY Fails at ¥129.00

Christopher Vecchio

ASIA/EUROPE FOREX NEWS WRAP

It’s no secret that the global market has a strong disdain for the Australian and New Zealand Dollars: year-to-date, they were the second and third worst performing majors against the US Dollar, shedding -9.31% and -5.00%, respectively, through yesterday. However, with market positioning extremely one-sided – as Senior Technical Strategist Jamie Saettele notes, a record short position for speculators and a record long position for commercials – it was likely that a correction occurred. Simply put, there were too few sellers in the market to sustain further downside price action in the Aussie and the Kiwi.

Accordingly, today we’re seeing one of the strongest performances out of the commodity currencies over the past year. At the time of writing, the AUDUSD had a 1-day rate of change of +1.90%, and over the past year, this has only happened twice: June 29, 2012, after the Euro-zone summit; and last Monday, June 3, 2013. Nevertheless, this rally in the commodity currency that is unfolding is a longer-term selling opportunity, but reentries should be on hold until market positioning moderates slightly – this is viewed as a short covering rally, not the establishment of new long positions.

Elsewhere, the Japanese Yen has given back some of its gains from yesterday, when a sharp decline in the US Dollar started in the US afternoon session. The Yen piques my interest over the next week to the long side for several reasons still. First, the Bank of Japan refused to act, meaning that there’s little reason to suspect the anxiety Japanese market participants have faced over the past three weeks will end. Second, the USDJPY has slid despite US Treasury yields hitting their highest levels in 16-months (a bearish divergence). Finally, in light of the higher US yields, I think that when the Federal Reserve stands pat next week with QE3, yields will pullback significantly, which historically has been negative for the USDJPY.

Taking a look at European credit, a sharp rebound in government debt across the region – lower yields – has failed to lift the Euro, with the EURJPY rejected on its advance towards ¥129.00. The Italian 2-year note yield has decreased to 1.591% (-6.0-bps) while the Spanish 2-year note yield has decreased to 2.011% (-8.6-bps). Similarly, the Italian 10-year note yield has decreased to 4.286% (-7.7-bps) while the Spanish 10-year note yield has increased to 4.523% (-11.4-bps); higher yields imply lower prices.

RELATIVE PERFORMANCE (versus USD): 10:50 GMT

NZD: +1.41%

AUD: +1.22%

GBP: +0.10%

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