(As written for My Paper on 6 December 2011. Click here to enlarge)
There were two headlines late last week that caused a rally in the risk currencies.
Firstly, it was the surprise announcement by the major central banks to boost liquidity. In a coordinated action to ease credit lending, six central banks agreed to reduce the cost of temporary dollar loans offered to banks by half a percentage point. The facility, called liquidity swaps, began yesterday and will run through to 1 February 2013.
Will the risk rally be sustainable? Not in my view – and here’s why.
By cutting the rate on dollar swaps, the cost of overnight borrowing for banks will decrease. This will increase the flow of dollar liquidity to European banks, which are struggling to attract funding at the moment. That’s the good news.
However, the expansion of credit lines has done nothing to address the structural problems currently facing Europe. To put it simply – the central banks are treating the symptoms, not the cause.
In fact, traders will be more concerned about the upcoming meeting between the EU leaders in Brussels this week.
The second headline hit the markets on Friday – when the US Labour Department said that the unemployment rate dropped to 8.6% last month from 9% in October.
This was the lowest rate recorded in over 30 months.
Payrolls had also increased to 120,000 after a 100,000 revised gain in October.
The “good news” fueled risk appetite and caused the risk currencies to strengthen against the US dollar again.
Will the risk rally be sustainable? Not in my view – and here’s 2 reasons why.
Firstly, more than half of the 120,000 new hirings came from retailers and temporary help agencies. This is expected, considering the extra help needed to boost spending during Christmas season.
Secondly, and more importantly – one of the major factors which caused the unemployment rate to fall was because 315,000 Americans left the labour force.
This group had given up looking for work and were no longer counted as unemployed. Suffice to say, the shrinking workforce contributed to the decline in joblessness in the USA, although they still remain unemployed.
Hence, in light of the discussion above, it would be a mistake for retail traders to think that the worst is behind us.
Top News This Week
Its interest rate week, and the major central banks from Australia, Canada, New Zealand, England and Europe will be announcing their respective central bank rates.
I expect all to pause rates, except for Australia, which could cut rates to 4.25% (from 4.5%) on Tuesday, 6 December 2011, 11.30am.
Short AUD/USD at 1.0165
Australia’s inflation fell to a two-year low in November, coming in at 2.1% compared to 2.6% in October. This could be a potential reason for the RBA to cut rates.
On the hourly chart, a range of 155 pips is spotted, with resistance located at 1.0330 and support located at 1.0175.
The bias is to the downside if the RBA cuts rates.
An entry is taken at 1.0165, 10 pips below the support level. A protective stop is placed 50 pips above the entry price at 1.0215. We will have two profit targets on this trade, exiting the second and final position at 1.0065.
Entry Price = 1.0165
Stop Loss = 1.0215
1st Profit = 1.0115
2nd Profit = 1.0065