As expected, the commodity currencies continued to fall today as the Greek default became a reality and markets became nervous as to who was going to be left holding the baby. The question of how to absorb the Greek debt has become a tussle between bondholders and European governments, neither of which wants to be left with the lions share. Despite this, the euro which has been heavily sold over the past couple of trading days held up remarkably, perhaps the affirmation of the Greek situation having already been factored in as a near certainty yesterday.
The higher-yielding commodity currencies, most notably the Australian dollar, are having to face the realities of coming to the end of their golden run. High relative interest rates, which have attracted investors and boosted the AUD to its highs earlier this year, are rumoured to be heading for a reduction as Australia starts to anticipate an improved inflationary situation alongside the cooling of gold. The rate cut is by no means certain but the mere possibility, for a currency which has become so used to rate increases, is enough to exaggerate a sell-off from those sitting on a tidy profit.
The downside potential for the AUD over the medium term is likely and reasonably anticipated by most. Over-stretched currency pairs tend to fall quickly and the current demand for the USD is exacerbating this. Technically, the AUD has moved well below the psychological level of 1.000 and there is a continued air of consensus suggesting that this downward trend is set to continue. Many traders are selling on the small rallies and hoping that there the host of fundamental global factors continue to weigh down on the currency pair. Despite this, there was some light relief for technical traders today who saw the AUD/USD bounce beautifully off the support level from mid-April 2010. This may instil some confidence that technical levels are coming back into play, especially with those currency pairs that have been heavily sold over the past days.
The EUR/USD reaction to today’s not so surprising news was relatively muted in comparison to the hectic sell-off off witnessed on Monday. Some analysts are looking at the current EUR studies as oversold, at least for the time being. It is true that both the Relative Strength Index and the stochastic oscillator are into oversold territory on the daily charts. These indicators tend to operate as self-fulfilling prophecies and when they fall into their extreme territories it is often a good signal that the markets will eventually be due a correction. It is, however, worth noting that markets have the potential to stay oversold and over-bought for a sustained period of time before they correct themselves.
Tuesday can be described as a day of consolidation but an interesting situation developing for both the EUR and AUD. The euro managed to put the breaks on its slide but these will need to be exceptionally strong with the Greek debt resolution still up in the air. The AUD managed to find the smallest support level today but, again, it is highly unlikely that this will this have the power to reverse its downward trend especially with the potential for a rate cut next month. Both of these currencies are in spiralling lower and much of their hope of a correction will lie with the sustainability of the international community’s appetite for the USD.