USD against Other Currencies

USD has staged a come-back over the past 2 months. The USD bullishness is due to external more than internal reason and such rally may not last unless USA's internal fundamentals strengthens or external fundamentals worsen.

The statistics showed it:

• AUD per USD has dropped from 0.9400 at the beginning of August 2008 to close at 0.8560 at the end of the month. As of yesterday's closing, AUD stands at 0.8150 substantially lower than previous month's close. It has accumulated 17% losses since its high of 0.9840 on July 15th.
  
• Less damaging move seen in the EUR which has dropped from 1.5620 to 1.4570 in August alone. The Euro is quoted at 1.4260 as of yesterday's closing price. Since its high of 1.6030 on July 15th, it has staged 11% loss against the USD.
• The SGD has seen similar moves where the USD has gained to SG$1.4340 per USD from its low of SG$1.3440. The USD has profitted 6.69% since July 15th against this Asian currency.
  
• NZD is the worst of the lot discussed here staging a 18.6% loss against the USD since March 14th 2008 as it first enters a period of recession among the countries in the world. It closed at 0.6680 yesterday from its high of 0.8210 in March 14th.
  
• GBP/USD pair has dropped from its high of 2.1160 in November 9th 2007 to 1.7650 as of yesterday. It has seen 16.6% loss against the USD since then.

Those who watched CNBC and Bloomberg would certainly understand the reason behind those big moves against the USD currencies. To summarise, here's why:

• For the AUD, it's the dropping commodity prices. Its commodity-dominated exports will soon cause damage to the earnings for the Australians. This is affirmed with the RBA (Reserve Bank of Australia) to reduce rates from 7.25% to 7% on concern of declining economic growth (YES, not recessionary yet). Reducing rates will have negative impact on the currencies as it lowers yield for a particular currency.
• Recessionary risk in Europe is high on European Central Bank's mind. Recessions brings lower export earnings which lowers demand for a particular currency. With the USA seen already 'ahead' of Europe in recession and the first to come out of it, the European region and its corresponding EUR currency faces this pressure and thus the decline.
• The Singapore currency remains resilient to the USD strength due to the persistent growth in the Asian region while only managing 6.69% decline. However, it is showing signs of weakness that may follow once it hits this Asian region.
• The New Zealand is the first country in the world to go into recession and this is reason enough to see the most decline amongst other currencies.
  
• The United Kingdom saw a stagnation of 0% growth in GDP in the last quarter. With inflation running high, it is technically already in recession. Its housing market decline follows those of its US counterpart. Overall, the UK economy is not in good shape and showing potential signs of slipping into recession in the next quarter or two, and thus its currency is reflecting that.

So what's the potential moves for the currencies:

• The AUD has a strong support at region around 0.8000. This level has been the resistance hit at least 5 times in Feb 2004, Nov 2004, Feb 2005, Mar 2005 and Dec 2006 before finally broken in Mar 2007. Once broken, it has the potential to go down to 0.7400 and onto 0.7000, the bottom level where it started catapulting itself to a high of 0.9840. With such a decline seen over the past 2 months, it's just a matter of time before the upward correction comes and if it does, it will potentially trade between 0.8000-0.8750. Having said that, the fundamentals remain bearish for the AUD/USD pair and with more bad news, i.e. RBA cutting more rates/recessionary pressure, it may potentially break this 0.8000 barrier without any difficulty.
  
• On chart, the EUR has formed a double top in April and July. This usually signals the change of direction in the currency movement. As of now, the EUR has dropped to the shoulder zone of a head-and-shoulder formation. This signify a short-term consolidation zone where it may trade between 1.4300 - 1.5000 in the next 2 months. Breaking this, it will head towards the strong on the level around 1.3700 (which represents the peak in Nov 2005 and broken in 2 years later in Nov 2007). It may potentially hit 1.3700 by end of this year.
  
• Just like the Euro, USD/SGD pair has also entered a period of short consolidation of 2-3 months at range of 1.4370-1.4630. At the end of the year, we could see the pair head towards 1.5000.
• NZD has just hit the support level of 0.6630 level against the USD and may trade in the range of 0.6630 - 0.7120 in the next 2 months. Should the fundamentals in New Zealand remains bleak, it will break this and heads towards 0.5920 by end of the year. Looking at the chart, it has the potential to hit 0.5920 much sooner (in one/two month's time).
• The GBP/USD pair has NO clear support level between current level (1.7650) and 1.7000. The UK fundamentals allow 1.7000 level seems realistic towards end of this month (or next 2).

Conclusion:
Long USD against a basket of currencies (but this doesn't mean shorting other currencies).

Related blog links: Bullish USD Outlook

Note: Invest at your own risk.