Friday, August 18, 2006

Focus on Crosses - AUD vulnerable

EUR/USD 1.2827 Hi 1.2879 Low 1.2836
USD/JPY 115.57 Hi 116.11 Low 115.44
AUD/USD 0.7601 Hi 0.7625 Low 0.7592
EUR/JPY 148.27 Hi 148.97 Low 148.11

We don't have a lot of new news to work with. Michigan Sentiment is out in the States today, but it's not market moving stuff. The view on the street is that we are headed for some kind of economic downturn in the States. So far only the most benign impact of this new view is showing up on financial markets: bond prices are rallying, the short end of the yield curve remains bid, stocks continue to see buying interest and the on FX markets the majors have remained range bound.

FX markets can be expected to continue focusing on the crosses. A weaker global economic outlook and profit taking in commodities is expected to see the AUD see further selling pressure. Given that the pressure being brought to bear by the American Administration on the Chinese to revalue their currency is having a knock-on effect on the JPY, the cross with the most downside potential is the AUD/JPY. The near term target for this cross is now 0.8700. And EUR/AUD can be expected to continue its climb. Our target of 1.700O remains unchanged. Selling on AUD crosses should see the AUD/USD come under pressure, for as long as the USD remains range bound. A break below 0.7600 will open the way for a test of 0.7500 in fairly short order.

Oil 70.67
Gold 625.00

Talk of economic slowing and the move towards still tighter monetary policy, and the negative impact on growth which is likely to result, are not helping commodity prices. Given that commodities have been flavour of the month for every passing speculator for quite a while, there is room to go as the rush to the exit continues. But this is nasty, margin-driven stuff, and moves continue to be brutal. This is not a trader's market it is a market for snipers. OIL has weakened in tandem. More downside is possible. For now, the selling into commodity rallies is the way to go, but only nimble players should even try to get involved. USD 70 is holding in OIL. Should that hold, expect a bounce.

GOLD continues to see profit taking and, if market talk of manipulation is to be believed, the idea is to push GOLD prices down further. The powers-that-be are working as hard as they can to fight the emergence of an alternative global reserve. There is considerable vested interest in maintaining the USD's status as the global reserve currency of choice. A test of USD 600 is possible.

The longer term outlook positive outlook for GOLD, however, remains unchanged. The colossal failure of the Bush Administration in Public Finance, International Trade and Foreign Policy has only accelerated the decline in international confidence in the value of the USD. GOLD is emerging as a new global reserve of choice and, until it becomes clear which currency is likely to pick up the mantle from the USD, GOLD will continue to benefit. Longer term players, who are prepared to wear market volatility, should buy on dips.

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