Dealer chatter increasingly focuses on the possibility that USD has become the funding currency of choice for the carry trade, due to its emergence as the cheapest to borrow on the global block. The theory certainly explains the strong negative correlation between USD and risk acceptance, as well as the strong direct correlation between AUD/USD and NZD/USD, and the S&P 500 stock index—the emerging signs of global financial stabilisation would tend to move the funding currency down, and the growth currencies and stock indices up.

Below is the daily chart for AUD/USD, with support and resistance levels marked in yellow. The vertical pink line marks the turn of the year:

The first trend line is drawn from 10 March’s low of 0.6305. It holds until 2 July, at which point the price action breaks beneath the trend line’s support. This trend line is significant because 10 March is the day after the S&P 500 hit its 2009 nadir at 676.53 and initiated its climb toward 950.00.

The second trend line is drawn from 13 July’s low of 0.7700. Although the price action briefly broke beneath the trend line’s support on 2 September, it has since resumed its climb. This trend line is significant because 13 July is the date the S&P 500 resumed its upward climb following a consolidation dating from early May—the climb that took it past the psychologically-important 1,000 level.

Below is a daily chart of NZD/USD with the same markup:

The trend lines on this chart are drawn from the same dates as those on the chart above.

Some of this strength versus USD can be attributed to the current weakness of the U.S. economy, and some to the China growth story the forex trading market is currently pursuing, which directly benefits the economies of Australia and New Zealand. However, it seems clear that something else is contributing to the bullish surge illustrated above. The most likely culprit is the interest rate differential: the RBA cash rate is 3.0%, the RBNZ rate is 2.5%, and the U.S. Federal Reserve rate is 0.0–0.25%.

For this reason, strong fundamental releases are not benefitting USD against AUD and NZD. Tuesday’s release of U.S. advance retail sales for August is a prime case in point. Retail sales printed a much stronger than expected 2.7% m/m, 1.1% less autos, and 0.6% less autos and petrol station sales (which were expected to be flat). However, after a tug-of-war between the bears and the bulls which lasted roughly two hours, NZD/USD surged over 50 pips, as shown on the 30-minute chart, below:

The actual time of the release is marked with a vertical pink line.

Event risks in the remaining forex trading week where this dynamic may be useful include:

U.S. August industrial production, scheduled for Wednesday, 16 September, 1:15 PM GMT (11:15 PM Canberra time). Markets expect a rise of 0.7% m/m. However, anything over 0.5% would indicate stronger growth and tend to encourage this dynamic.

U.S. initial unemployment claims for week ending 12 September, scheduled for release Thursday 17 September, 12:30 PM GMT (10:30 PM Canberra time). Markets expect 561K claims to be filed. A lower number would signal a positive turn for the U.S. economy and tend to encourage further risk taking.