After a tumultuous two weeks and an omnious close last Saturday morning the Aussie settled down to trade a 2 cent range this week. That’s not to say that traders didn’t test out the support at 1.05 we have identified previously. But having found it solid, they turned the other way, making a high last night of 1.0712.
You can see the chart below and it is clear that even though it was fairly quiet trade on a daily or weekly basis the hourly chart shows a little uptrend within the last few weeks downtrend from the 1.1013 high.
But the week’s close, a little lower than it was from last night’s high, masks a big move in markets with the EUR down 1% Friday on growing concerns about Greece. Last night, Fitch cut Greece’s debt three notches and the FT described the contagion this way:
Greek government 10-year bond yields have spiked 55 basis points to 16.55 per cent as investors position for the expected restructuring, and after Fitch downgraded Athens’ debt.
Perhaps of more concern to the market is a deterioration in Spanish sovereign bonds, where the yield on 10-year paper is up 8 basis points to 5.48 per cent, closing in on the euro-era high of 5.55 per cent hit in April.
So the European peripheral sovereign debt crisis is not going to get better in a hurry. The plan appears to be to let GReece extend the maturities on its debt, which is how Argentina defaulted early in the millennium. Indeed the notion that an extension of debt in Greece is not a default is ludicrous in the extreme. Imagine if you said to your bank manager that things were a bit tough and you were planning on paying back in a few years late. It’s a default and its coming.
So in that context, the Aussie held up really well but the EUR is looking like it wants to break down to 1.39 at a minimum from 1.4161 close.
Indeed while the MACD indicators suggest a potential slowing in the rate of decline I’d be trading for a break lower next week and a test toward 1.3903 (50% retracement of the 2011 rally). A push through here gets it to 1.3659.
In the context of last week’s discussion about a rebound in the USD Index, this implies a retest of the long downtrend of the past year at 76.63. First stop 76.03 which is fibo resistance.
What this means for the Aussie is an outperformance on the crosses as we have been suggesting for a little while now, particulalry against the EUR and GBP.
But this comes with a very big caveat – I’ve assimilated John Mauldin’s line about the growing “fingers of instability” and I believe that they are contributing to a global financial landscape that is as fragile as it has been since the lows in equities back in march 2009. So I don’t actually know what a Greek default might do to markets and investor sentiment. My guess is that it won’t be good.
So I still hold that a medium term top is in place at 1.1013 for the Aussie against the USD and that once 1.05 breaks, if it does, then Aussie will head toward 1.02/1.035 zone.