USD Remains On The Ropes. More Weakness To Come?

 | Jun 12, 2013 07:27AM ET

EURUSD is well above 1.3300 and AUDUSD may finally be starting a significant correction sequence as we search out explanation for the greenback’s weakness outside of the recent USDJPY correction.

The weakness in the US dollar demands an explanation at this point, with GBPUSD back challenging its 200-day moving average and EURUSD trading well above 1.3300 while USDJPY is considerably off recent lows. So what is driving the greenback weakness outside of the most obvious recent source of strain: the ongoing turmoil in the Japanese Yen and the volatility of the USDJPY pair, where enormous positions have been likely accumulated over the last several months?

This USDJPY correction has driven most of my explanation of the US dollar weakness thus far versus the Euro and the British pound over the sequence of USDJPY consolidations that have taken place in the last couple of weeks. But there are other themes at work here from all appearances and some of the explanation has to be a combination of the worry that the US data looks far too mixed for the Fed to consider a taper any time soon while the ECB can’t join the competitive devaluation game and the UK data is improving sufficiently to keep policy on hold in the UK.

Still, the Euro and pound strength are a bit hard to swallow here, given how rapidly the stronger Euro is likely to become a problem for Europe (and assuming that the entire German Constitutional Court issue blows over again without any worries for the EU – though what the GCC’s deliberations could do is add to the impression that the ECB’s hands are more or less tied and that it will be forced to maintain relatively “tight” policies.) As well, in a structural sense, the UK economy and government are far more challenged than the US by the risks from rising yields. But USD bulls should respect the price action, and barring sharp reversals, the EURUSD rally could carry through to above 1.3400 here if the 61.8% Fibo at 1.3342 is cleared (the 76.4% Fibo comes in at 1.3485)

AUDUSD
The technical argument for a reasonable consolidation in AUDUSD is stronger than ever here as we have momentum divergence in the stochastics and MACD and the pair is already trading above. The last extension . The magnitude of moves could be very large here and one wonders if AUD buying could also help to temper the immediate upside for the Euro more broadly speaking, as EURAUD has been on a moonshot lately and would be in for heavy pressure on Aussie consolidation. We’re already at first resistance for the pair in the 0.9500/25 area, but 0.9750/0.9800 could quickly come into view as the pair has enormous room to move without threatening the overall bearish trend.