Calm before the Storm in the Forex Markets

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This is a commentary from Richard Wiltshire, Chief Dealer of Foreign Exchange at ETX Capital.

The FX markets are quiet and subdued post the Easter Holiday weekend, but it may be a case of  the calm before tomorrow’s “Central Bank storm”, which includes rate decisions from the Bank of Japan (for those sitting in London this is tonight) the ECB and the BoE.

Elsewhere, it could also be the calm before the storm for commodity currencies with a slightly increased appetite for risk, albeit fragile, beginning to creep back in to the market.

The AUD managed a small squeeze higher on better than expected trade data (strongest trade balance figures since late 2011) and improving PMI readings from China. Exports increased 3% month on month, but before the AUD bulls get too excited, it’s worth bearing in mind that much of the gain can be attributed to higher export prices for commodities rather than a dramatic increase in export volumes themselves. Sales revenue from major commodity exports continues to fall, especially for the top three products – iron ore, coal, and natural gas. This also dovetails with the news that Rio Tinto is looking to sell more stakes in some of its Australian coalmines (WSJ) in order to cut costs with demand for coal from Europe and the US falling.

So in reality, this number is unlikely to have any real influence on the RBA’s decision making process given the volatility of the data set and hence AUD remains to a certain extent “sidelined” waiting for a catalyst to break the range play. Nonetheless with the USD giving up some ground across the board in thin and lacklustre FX Markets, we seem to be approaching some key breakout levels as the AUD/USD has shifted back to the important 1.0490/1.0510 resistance zone (pushing last week’s high) The price action at these levels in the coming days should define whether a closer test of the medium term range highs around 1.0620 is underway.

For the bulls amongst you, we need a break higher sooner rather than later, as the longer we stay below, then attention could shift to the fact that materials are weaker, as are copper and silver and investors may start to feel that the best expression of what they are seeing in the physical commodity prices, is to short the currencies themselves!

1.0520 remains the level to break on the upside if we are going to get a more sustained move higher with numerous stops reported to be building above, whilst dip buyers bids in low 1.04 area will need to be cleared to open up stops below 1.0370 for a test of 1.0200/20 area (10th March low).

Further reading: Forex Analysis: AUD/USD Recovers from Dip to Reach for Retest of Recent High

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