The Aussie Dollar continued higher this week on the heels of its monetary policy minutes Monday night, before stalling right at short-term resistance at 1.0200. The next big news event for the Aussie and the other financial markets is Wednesday's FOMC business, where the Fed in our estimation is likely to continue its current "twist" operation, albeit at a slower pace, as it starts to unwind its QE with Its left hand while flexing its right arm for the cameras. The Aussie holds an edge for us as a trading vehicle because it is a bonified asset class market, unlike gold, or any other currency or commodity without a yield or dividend. Because of this it is a market that institutions still accumulate, and one that is a serious choice to divert non-asset class investments such as commodities and no-interest or low interest bearing currencies into as QE winds down. That and the fact that a slowdown for its biggest client, China, means only 8% GDP growth, makes it a fine long-term trading vehicle, and particularly in a less risky economic environment. The Aussie is also not in the U.S. Dollar index meaning it can still appreciate in a pro-Greenback cycle.
Negative Interference in EURUSD
The Euro followed the asset class markets higher in Tuesday's U.S. session, ahead of Wed's FOMC meeting. In physics the term for being short Euro recently is called negative interference, when the waves of one source - think Euro -- are divergent to the waves of other sources - think asset class markets, i.e.: stock indices and carry pairs - and the more powerful source wins out. The best way to play that scenario is long asset class markets. Once the asset class markets correct however, that is the time to be short euro. So a counter-trend correction in Aussie will likely mean a resumption of impulse trade lower in EURUSD, and that is the ball that FX traders need to keep their eye on. For all the time spend on a tight rope these past several years the Fed has gotten pretty good at it, and the ECB has been watching. Both central banks have gotten very good at getting what they need from markets and tomorrow's FOMC business will likely be no different. The best impression the Fed can give is that while Europe is a concern, it is a manageable one, which is why we feel the Fed is inclined to continue to back-peddle away from QE, yet leave that option open. No one is more understanding of the diminishing returns attached to QE than central bankers and treasurers. We believe that while the Fed won't do anything near-term to jeopardize the Euro, the real question is not what will the Fed do, but where will speculative flows turn to once the majority of market participants realize QE is in the rear view mirror. We feel the Euro, and more speculative markets such as metals and commodities will not benefit, while stock indices and the Aussie will.
USDCAD Closes Below 1.0200
The Canadian Dollar strengthened in sympathy with the other majors on Tuesday with USDCAD closing below 1.0200 for the first time in nearly a month. With little new developments regarding economic data, and the Greenback weakening throughout the London and early U.S. session it was all red candles for USDCAD intraday. We see potential support at 1.0125 and at 1.0020 - see Figure 3 -- with the later definitely a value area we would monitor for both short and long-term buy set-ups. As much as we'd like USDCAD following a dip, we don't want to try to see over the horizon, and definitely have a near-term down-side bias ahead of tomorrow's FOMC business.
Jay Norris is the Director of Learning at www.IBUnIversity.com
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.