With AUD most vulnerable to move the most during bouts of risk aversion while the JPY is primary safe haven currency, the AUDJPY will fall most aggressively should equities weaken, as we expect. JPY has outperformed USD as JGB's rate advantage over US Treasuries sustains.
The RBA minutes and RBA Governor Stevens' speech helped boost AUD temporarily. But then the dollar clawed its way back largely due to stops and lower equities. The latest stress test results also tempered investor enthusiasm. Dow futures are about -82 and looking for a lower open of NY session following a mixed Asian session. Q2 earnings season picks up with over 20 S&P 500 constituents reporting, with several financial institutions in the mix. We get the latest housing starts and building permits data. The expiration of the homebuyer tax credit will likely result in mixed data at best. Sentiment will remain choppy ahead of stress test results but US data on expectations could help the dollar benefit on pullbacks in risk sentiment.
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AUD/USD has hit a significant resistance level at .8660 and NZD/USD has hit resistance into the same fractal. We see upside on risk as limited from current highs. Although we could see higher levels, we see current levels and higher as opportunities to sell.
Even as US equities closed 3% higher, long-term oriented investors appear to be steering clear of equities, particularly with the risk of further rising risk aversion with the approaching earnings season. Q2 earnings could disappoint lofty investor expectations and keep risk-seeking at bay, which could dampen the recent support for the euro. UBS FX flow data also suggests that structural outflows from the Eurozone continue and we hold the view that euro rallies should be sold, particularly versus the dollar and the yen. Looking at 1.2700- 1.3000 area for selling depending on how technicals unfold.
We have accurately anticipated the decline in risk that has taken place the past several weeks, as proven in previous issues of Forex Notes. We were far more specific in the accuracy of the price levels and turning points discussed in Pro Traders Club and had the opportunity to capitalize on the movements. We anticipate modest risk recovery before another round of selling in the coming weeks. On the institutional side, we saw short EUR holders get caught in a short squeeze during thin holiday trading. Another leg up on EUR is likely before buying eases off.
On April 1, the yen looked poised to weaken significantly. Policy rates in Japan and the rest of the G10 were beginning to diverge, led by an aggressive RBA tightening campaign which eventually saw the cash rate hiked six times in seven meetings. Furthermore, and more significantly, the market anticipated a wave of yen selling as Japanese life insurers looked set to begin their annual overseas investment program.
Yet since then, USDJPY has fallen steadily from 93.44 to close at 87.75 on Friday. The decline was interrupted only by a brief episode of political uncertainty surrounding the resignation of former Prime Minister Hatoyama. Market participants could legitimately wonder if life insurers have switched tactics this year, preferring instead to invest closer to home? No!
Japan's life insurance companies have been just as keen to invest overseas this year, and their foreign bond holdings have increased by approximately ¥1 trn during the months of April and May.