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By HaleStewart May 23, 2014 11:14 am
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A Technical Look At Some Major Currency Pairs

From late January to early April, the Aussie dollar was rallying verses the dollar.  But after crossing the 200 day EMA, the Aussie lost strength.  After making a second attempt at rallying over the 200 day EMA, the Aussie has fallen below this important technical line.  Now all the shorter EMAs are moving lower and momentum is dropping.  

Australia has the best overall performing economy of the major OECD economies since the end of the recession.  Growth has been consistent and unemployment is low.  Interest rates have also been higher, making Australian deposits and government bonds an attractive investment.  In contrast, the US economy has been lackluster and was recently hit by a winter induced slowdown, which explains why the Aussie outperformed the dollar in the first quarter.   But recent US numbers show a rebounding economy which explains the recent sell-off.

Since early February, the dollar/yen as been trading between 100 and 103.  While the long term trend is still higher (see the rising 200 day EMA), as this indicator approaches the sideways moving prices traders will have to make an important decision: sell or buy.

The big wild card for this pairing is the Japanese economy post sales tax increase.  Most analysts (myself included) think the Japanese economy will slow sharply in the second quarter as the sales tax increase takes effect.  Should this happen, expect the dollar to rise in the near term.

For the last year, the euro has been consistently strong verses the dollar for one reason: central bank jaw-boning.  When Mario Draghi said he would do "whatever it takes" to save the euro, traders took him at his word and have continually driven the euro higher since.  However, recent EU news has been weak: GDP growth is especially disappointing.  This explains the euro's drop to support over the last month, with the 200 day EMA lurking as the next price target.

The pound has been rallying versus the dollar for the last year for two inter-related reasons 1.) traders have bet the UK will increase rates sooner than the Fed because (2) the UK is growing at a stronger clip than the US.  There is nothing in the recent data to seriously challenge this perception. 

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer 

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