(As written for My Paper on 11 October 2011. Click here to enlarge)
Risk currencies are having a brief rally this week due to three reasons:
1. United States employment situation beat expectations
2. Bank of England increased its asset-purchases ceiling
3. European leaders pledged to recapitalise banks
US non-farm payrolls (NFP) rose by 103,000 last month with private sector payrolls rising by 137,000. This was higher than the 50,000 estimate by industry experts. Additionally, the August NFP report was also revised up from zero to 57,000.
At the start of the week, EUR/USD edged up nearly 100 pips to reflect the cheer of the jobs report.
In a surprise move last week, the Bank of England raised the ceiling for its asset purchases to 275 billion (S$553 billion) pounds from 200 billion pounds. Tantamount to a quantitative easing, the move was the first loosening of British monetary policy since the depths of the global financial crisis in 2009.
After plunging 200 pips at the announcement, the GBP/USD has surprisingly rallied; climbing over 375 pips since the start of the week.
European leaders met in Luxembourg last week to hammer out concrete plans to stave off a European financial crisis.
German Chancellor Angela Merkel said European leaders will do “everything necessary” to ensure that banks have adequate capital, joining French President Nicolas Sarkozy in persuading investors that the situation is under control.
The heads of Europe’s two biggest economies reiterated their intention to keep Greece in the euro zone, and Mr Sarkozy set a deadline of Nov 3 – the date of the Group 20 summit – to address the crisis in Greece.
Despite the apparent good news that has buoyed markets, I expect the optimism to be short-lived. The worse is not over.
This is because QE3 is still on the cards as fas as the Federal Reserve is concerned.
With US unemployment hovering at 9 per cent for over two years and growth slowing down, the Fed is running out of options to stimulate growth and consumption.
Additionally, French-Belgian Bank Dexia has already become the first victim of the debt crisis in Europe. The purging has only just begun.
Short AUD/USD at 0.9930
On the four-hour chart, AUD/USD is moving in a range after a massive downtrend.
The optimism over the last week has created a brief risk rally in the AUD/USD. In the range, a resistance is detected at 0.9947. Our bias for this week is to the downside.
We will enter for a short once prices retrace and turn back down from the resistance level.
Entry is taken at 0.9930, a few pips below the resistance level. A protective stop is placed above the previous high and we will have two profit targets for this trade.
Entry Price = 0.9930
Stop Loss = 1.0010
1st Profit = 0.9850
2nd Profit = 0.9770