Australian Dollar Weekly Outlook

September 19, 2011

FOREX

Welcome to this week’s edition of the Australian Dollar weekly wrap and outlook. We’ve moved it to Monday to better sync with trade.

The AUD traded down to a low around 1.0180 last week as concerns grew that Europe was going to be unable to get itself sorted and avoid a Greek bailout. The positive news that flowed from the phone hook-up between German Chancellor Merkel, French President Sarkozy and Greek Prime Minister Papenddreou and then the actions by the ECB, and the Fed, to lend $US to European banks that were struggling to get them, turned sentiment and helped risk/punting assets rally.

The AUD benefitted along with these other risk/punt assets. This should be no surprise given the daily correlation (remember I am using directional price moves as an indicator – nothing more fancy than that) between the AUD and the S&P 500 over the past 2 years has been 0.869. Similarly with the price of gold and crude and even the ICE Coal contract it has been 0.85 or above. With the euro it has only been 0.449 over this period.

Now it is important to note that correlations of market instruments and assets are never generally fixed or constant, rather they move through a range, but it is interesting that the shorter the period we look at, 12 months and 6 months, these correlations get much weaker. At the 3 month period they are stronger once again.

This tells me a few things about what is driving the AUD:

  1. It is still seen as a growth asset and trends with expectations of global growth but,
  2. It is also now being viewed as having its own intrinsic value to investors but,
  3. Risk off periods still hurt it, just not as much as they once did.

Safe haven? No. Re-rated? Yes.

So let’s turn to the Australian dollar and see what we think the week might hold.

My old colleague Richard Franulovich at Westpac in New York wrote last week that:

There is a case for some stability in risk assets going into the FOMC meeting Sep 20-21 and the G20/World Bank/IMF meetings in Washington Sep 23-25. Individual country policy responses to the deterioration in economic and financial conditions have been gearing up lately and hopes will surely build for a more coordinated cross-continental policy response around the G20. We doubt that will represent a definitive turning point however.

The weekend’s action, or lack thereof out of Europe and the ongoing divisiveness and lose talk has actually knocked the AUD and EUR on their heals this morning with the AUD reversed to just above 1.03, having closed Saturday morning at 1.0360. In the grand scheme of things 50 or 60 points, even 100 on the AUD isn’t that much of a move (average true range at present on the daily is 132 points) so I’m not going to extrapolate early morning’s trade into anything too worrying.

Having said that though, it seems to me the supports for the AUD have eroded somewhat over the past few weeks/months as I highlighted in last week’s Australian Dollar Weekly Wrap and as such the AUD is vulnerable if this European situation escalates again.

Last week the technical guys at JP Morgan put out a piece (quoted in a Bloomberg Terminal story that a mate of mine who is an FX dealer in Perth sent me) saying the AUD is due for a bounce but added that:

The burden of proof is on the bulls…The $1.0485 area was where we saw it break down last week, and as long as it is under that level, the Aussie is vulnerable down to a cluster of support around 1.000. While there is still downside risk, we are close to some sort of bounce.

So not the most ringing endorsement and there are a few get out of jail free cards there but they are essentially saying the Aussie is looking for a base. Now, we know that market positioning in equities is stretched to the side of extreme bearishness at the moment and if we use this as a proxy for risk assets generally we can probably see where JP Morgan are coming from. But as they say, the onus of proof is on the bulls.

The Aussie is currently under pressure in Asian trade and we can see in the above chart that there appears to be an emerging downtrend on the daily charts although I hasten to add the big 1 year uptrend is yet to break so we must respect that, at least until it gives way. 1.0175/80 as last weeks low should be support on the downside as will 1.0100/15 which is where the uptrend line sits today – by the end of the week it is around 1.0130.

Bigger Picture though it is increasingly looking like the AUD might have a double top above 1.1000 as depicted by the redline on the above weekly chart.

In last week’s wrap I said I liked it lower, intra-week I thought the bounce off 1.0180 and the apparition of European resolve might trade the Aussie to 1.0450. So much so that I actually wrote a piece to this effect (this game is never easy).

For now the AUD is trapped in a range. Markets arent sufficiently scared to hit it lower nor are they ebullient enough to take it sustainably higher. But if AUD breaks lower than there is still plenty of support particularly at the recent low of .9929. How far it might fall if something goes awry with Greece and or Europe will depend on the catalyst and I would have to re-evaluate my thoughts.

The outlook for the AUD is as clouded as that for markets generally but as Europe is imploding so the USD is gathering up a few brownie points and some buyers. This alone puts the AUD under some pressure – so I guess I remain a seller of rallies.

Cross posted with www.macrobusiness.com.au

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial advice we are happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au

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