Trading Mostly Choppy in Overnight; U.S. Durable Goods Disappoint

DailyFX   |  March 28 2012 9:36 EDT

The sell off that started early in the U.S. session on Tuesday found follow through in Asia and Europe on Wednesday, with the commodity currencies at their weakest levels since Friday. Risk-appetite was not helped by another disappointing U.S. economic release, this time in the form of durable goods orders.

Fundamental Headlines

- Assad’s Acceptance of UN Plan will be tested by Actions – Bloomberg

- Europeans See Crisis near End, Bernanke Warns on Recovery – Bloomberg

- U.K. Faces Bigger Hill to Climb After Fourth-Quarter GDP Cut – Reuters

- Fed Prevented ‘Total Meltdown,’ Bernanke Says – WSJ

- J.P. Morgan was ‘Assured’ on MF Global Transfers – WSJ

European Session Summary

Higher yielding currencies and risk-correlated assets continued their tumble lower, with the commodity currencies, the Australian, Canadian, and New Zealand Dollars posting among the largest losses on Wednesday against the U.S. Dollar. Risk-aversion was the theme through-and-through, with the Japanese Yen coming in as the top performer ahead of trading in New York. This is an unusual occurrence given the seasonality of the Japanese Yen (more below), and perhaps is a sign of greater troubles brewing.

Taking a look at credit, the U.S. Dollar was getting a lift from slightly elevated Treasury yields, while European credit was broadly stronger across the board. The European Central Bank’s interference in the secondary bond markets continues, with the Portuguese 10-year bond dropping another 24.5-basis points to a 10.620 percent yield. Both Italian and Spanish 10-year bonds had improved as well, with their respective debt trading at 5.096 percent and 5.300 percent. The resiliency of periphery debt in recent weeks has been a significant contributing factor in supporting the Euro.

Pre-North American Session Data

Although there was significant British and German data out in the European session, the most important release of the day came at 12:30 GMT, when U.S. durable goods orders were released for February. Orders were up by 2.2 percent last month, a strong improvement from the 3.6 percent contraction in January, marking the fourth monthly gain in the past five periods. Still, the 2.2 percent actual was a disappointment. According to a Bloomberg News survey, markets were looking for at least 3.0 percent growth.

Participants took the event as mostly negative, with the U.S. Dollar gaining traction across the board, save against the Japanese Yen, following the print. The AUDUSD and EURUSD both broke below key psychological levels, and barring dovish commentary from policymakers, risk-appetite is likely to remain under pressure.

EURUSD 5-min Chart: March 28, 2012

Charts Created using Marketscope – Prepared by Christopher Vecchio

Overall, the Japanese Yen, surprisingly, has been the top performer, gaining 0.19 percent against the U.S. Dollar (more on this in a moment). The Euro was the next best major, with the EURUSD up 0.08 percent. The other European currencies, the British Pound and the Swiss Franc were weaker, with the Sterling’s losses outpacing the Franc’s. The Australian Dollar has been mangled this week as growth concerns out of China weigh on investor sentiment, with the AUDUSD down 0.66 percent today and 1.34 percent the past two days. Still, with U.S. equity markets holding up, for the historical correlation between the AUDUSD and the S&P 500 to hold, either the Aussie will need to rebound sharply (implied 1.0775 at current S&P 500 level) or the S&P 500 will need to correct lower (implied 1310.00 at current AUDUSD level).

Seasonally speaking, the Japanese Yen tends to depreciate from mid-March to early-April as companies move funds around for tax exemption then repatriate said funds just a few weeks later (thereby lifting the Yen). This would suggest to look for a weaker Yen in the days ahead (a push higher by AUDJPY, NZDJPY, and USDJPY) before a deeper retracement by said pairs in three weeks.

24-Hour Price Action

Key Levels: 13:45 GMT

Thus far, on Wednesday, the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) is trading higher, at 9973.51 at the time this report was written, after opening at 9954.35. The index has traded mostly sideways, with the high at 9973.51 and the low at 9935.67.

--- Written by Christopher Vecchio, Currency Analyst

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