Australian Dollar Crushed as FOMC highlights economic weakness

September 22, 2011

FOREX

The FOMC released the decision from its two-day meeting early this morning and, as widely anticipated, they announced that they were going to extend the duration of their treasury holdings in order to try to get the entire interest rate curve lower. They said  they had,

“decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less.”  

But as I write the AUD is sitting at 1.0044 down 230 points or 2.25% from yesterday morning’s level, the Dow and S&P closed on their session lows dropping 2.49% and 2.94% respectively and even gold and commodities were lower. You may be asking why when the Fed is trying to support growth by lower the interest rate curve all these growth related assets fell.

The answer that comes to me top of mind is that the fact that they need to do this reinforces just how dire things really are and I’ve been waiting for equity (and thus growth) expectations to more closely align with bond market expectations for a while now – perhaps this is the start. You can’t miss the dichotomy here in this chart below.

We now have evidence for three down cycles that bonds move first and then equities catch up later. Equally its clear that the bond guys got more ebullient in the lead up to the GFC than the equity guys but for me I reckon that this relationship suggests that equities and other growth assets have some further catching up to do.

The other point I’d make is that the FOMC by necessity in justifying this decision, given there were again 3 dissenters, had to focus on the negatives for the economy and once again growth related assets took this poorly. On growth the FOMC said,

“Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has been increasing at only a modest pace in recent months despite some recovery in sales of motor vehicles as supply-chain disruptions eased.” But the clincher for growth assets was the statement that “there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate further.”

Code for deflation – growth assets don’t like that one little bit.

So lets look at thee outlook for the AUD.

A couple of days ago I wrote that the AUD looks biased toward 0.9994 and even though as you can see from the MACD on the hourly chart is looks overcooked to the downside in thee short-term thee reality is that the legs that have underpinned it are being eroded as I pointed out two weeks ago in the Australian Dollar Weekly Wrap.

Anyway, you can revisited that Piece here if you like but looking at the price action this morning you can see it’s heading toward the 0.9994 lefvel i highlighted. It’s probably got a chance to bounce a bit but I wouldn’t expect it to hold any gains for longer than a few hours to a day before heading lower.

Which brings me to the daily charts. My FX dealer mate in Perth and I had a good old chat yesterday and his simple thoughts were that while the AUD was below the 200 day moving average at 1.0397 and given it had rejected this moving average at the run up just last Friday the AUD was a shot duck – nice call Damo. Equally my old colleague from Westpac in New York Richard Franulovich reckons the AUD is probably going lower as well citing a lack of longer term buyers at the moment.

The AUD is clearly in a downtrend as the chart above shows. It is coming down toward really important levels around the .9910/40 region. Her are the levels and importance

  • 0.9936 is the 38.2% retracement of the move from 0.8083 in June 2010 to the high this year –
  • the recent low of 0.9928 is only marginally through that and price bounced quickly from this level so I would say it held on the dailies. The AUD then bounced back to 1.0765 
  • 0.9913 is the big downside support – it is the bottom of the uptrend channel the AUD has been trading in since march 2009.

So you can see the convergence of very important support in that region around 0.9900/50 and I would say if we get much through 0.9900 the AUD is likely to get absolutely pollaxed. I’d be then targeting 0.9500/9600.

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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  1. Weekend Reading – Stuff we found interesting this week | Lighthouse Securities - September 24, 2011

    […] Australian Dollar is also getting hit hard. Links to two of my articles are here and here. These were cross posted with Macrobusiness the growing powerhouse of Australian […]

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