FX Trading

The latest rally has been well capped ahead of key short-term resistance by 1.2925, with the market now looking like it is poised for a bearish resumption back towards 1.2585 over the coming sessions.

The US Dollar and Japanese Yen advanced as shares slid in Asian trade, boosting demand for the safety-linked currencies. Stock index futures hint more of the same is ahead in European trading hours.

The Reserve Bank of Australia kept interest rates unchanged at 4.50 percent as expected. The Australian Dollar was little changed after the announcement with the outcome having been priced in well ahead of the release.

The lack of activity from the dollar today shouldn’t surprise anyone. With US capital markets and banks closed for the Labor Day holiday, there was a natural dampener on volatility and any overzealous attempts to jump start a trend. Typically, we say this is due to a lack of volatility; but that is not technically true.

The US Dollar is testing key support as crude oil prices hint a downturn is forthcoming while stocks test an important Fibonacci retracement barrier, pointing to a resolution in the risk on / risk off tug of war just around the corner.

The AUD/NZD remains confined to an upward trending channel as the Aussie continues to be the favorite of the two commodity dollars. Australia’s greater exposure to Chinese growth has raised its outlook for potential growth. The recent strength in Chinese PMI was evidence that the Asian giant continues to realize firm domestic growth despite the government takes steps to cool the economy before it overheats. The RBNZ has followed in the footsteps of the RBA when it comes to monetary policy as its domestic picture isn’t as bright, which has led to the Kiwi reversing its mid-year gains against its antipode counterpart. Concerns that the Australian policy makers could signal an end to their tightening at their upcoming rate decision has started to weigh on the high yielder. However, stronger than expected second quarter Australia growth furthers the case for relative Aussie strength. The AUD/NZD is now testing the lower bound of the current channel adding to the case for a reversal.

Central banks have great insights into their domestic economies as well as the global environment. Therefore, with a slew of monetary authorities meeting this week we could see medium expectations shaped by their comments. Commodity driven economies have led the recovery and signs of continues strength in Canada and Australia could feed into prevailing optimism favoring high yielders at the detriment of safe haven currencies such as the dollar, yen and franc. However, continued pessimism from the U.K. and Japan-two of the six largest economies- could limit potential optimism.

A drop in forex market volatility expectations suggests that currency moves may slow in the week ahead, limiting optimism on volatility-friendly Breakout and Momentum strategies. Yet a continued slide in the safe-haven US Dollar shows few signs of slowing amidst a major improvement in financial market risk sentiment. We are left in a somewhat difficult position in determining our strategy bias. On the one hand, recent price moves suggest that major currency pairs will continue their pronounced trends and large day-to-day swings. On the other, the drop in volatility expectations points to otherwise. We have little option but to leave our biases unchanged until further clarification.