Australian Dollar – the little currency that might.

October 24, 2011

FOREX

As I sit and write this week’s Australian dollar piece I am struck by just what an important juncture we currently sit at. I’ll discuss that a little later, but first I wanted to introduce my new stop light for the Australian dollar on a 3 month, 1 month and 1 week basis. This is a graphical representation of how I am seeing the market at the moment and will help as a framework for what is driving the view. Equally it will be important in helping readers who are not as active in the market get a sense of the differing timeframes we look at when we are framing our view.

As I have written in the past my process is consistent across varying time frames, from the day trader to BHP and this stop lights will give a quick snapshot of my subjective model and view of how things are standing up for the next week, month or quarter. This is important because I could, and often do, hold different views over  multiple time frames. It’s why the answer to the question “what’s your view on the Aussie” is always “what’s your time frame”. Different timeframes will have a different weighting on drivers and thus a different outlook:

If we work our way down from the past 3 months, past month and past week you can see we have gone from a market that exerted almost entirely downward pressure on the Australian dollar to something that is a more neutral but positive over the past week. If we then see the outlook for the next 3 months you can see my bias that the Europeans will get some sort of short term fix in place, while on a 3 month time frame I am on balance neutral, so I’d expect a trading range, in the shorter time frame I can see some upward pressure has the potential to come into play for the Australian dollar but only if the near term technical resistance which looms large and strong over head can be bested. 

My Lord, what a currency though and I must be frank and say that being this close to near term resistance stops me from being outright bullish and would actually have me short in front of this resistance first.

Lets look at the technicals then:

You can see the AUD/USD has broken through the top of the downtrend that has constrained it for the past two months but not yet decisively. This is perhaps because of the proximity of two very important technical levels over head. Now before I go on let me say for the fundamentalists out there – even if you don’t believe in technicals and think they are some sort of mumbo jumbo – you have to respect the fact that other traders do believe in them and so trade-off and around them.  They have to be part of your analytical toolkit. 

So what is this strong resistance to the top side? The 200 day moving average which comes in at 1.0391 today and the 61.8% retracement of the 1.1080 to 0.9388 fall which comes in around 1.0430ish. You can see traders respecting, selling in front of, the 200 day moving average in last week’s trade. So that is the key zone and if the AUD/USD can clear this region then it is a good show for a run at 1.0765ish.

But it’s got to clear it first.   And that’s not going to be an easy task given that commodities are still trapped within their down trend as you can see in the chart below of the Goldman Sachs Commodity Index. The 645/50 region is huge – if this breaks out then some sort of resolution or other positive news has come out of Europe and we just might be off to the races for a little while:

 

Now neither of these are positive factors at the moment are they? And with a low CPI in prospect in Australia this Wednesday likely to increase the chances of an RBA rate cut why am I so sanguine on the currency, you might wonder? 

The answer is that the cascading pessimistic crescendo we had on the run down to 0.9388 and the subsequent bounce in the Australian dollar and other markets tells me something about the structure of these markets at present. Now remember that 2008-2011 comparison chart we showed last week put us in the sideways to up phase before the eventual fall.

I’m not saying this is a fait accompli but as  Jeffrey Hirsch over at Almanac Trader said over the weekend,

The market has shouldered much negative geopolitical and economic news over the past several months and looks to be stronger for it.

I have to agree, which is why I have been calling it a pessimistic crescendo and likening it to the March 2009 low. Probably not as important or long-term but a good old clean out of the pessimists that is for sure.

Cross posted with MacroBusiness

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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4 Comments on “Australian Dollar – the little currency that might.”

  1. tristencosgrove Says:

    Toot Toot ! I loved that story as a kid and read it to my kids. Short of a collapse in China flowing through to our (Australian) commodity prices and volumes and short of a domestic real estate plunge placing pressure on local banks, I think Australia has a great future long term in its own right and the Aussie dollar as a proxy of the Australian economy may appear sound relative to other currencies that represent nations or blocs that are suffering under sovereign debt concerns and general “technical” insolvency of an unknown number of global banks – unknown due to a masking of market values (http://creditwritedowns.com/2010/08/hiding-bank-losses.html) allowing banks to delay and pray, which could work if growth resumes soon, but if not, eventually writedowns will come through, in my view anyway. Great post Greg. Thank you for sharing your “Stop Light” Matrix, giving us a glimpse of the robust processes that Lighthouse has in place.

    Reply

  2. Chris Lewis Says:

    No chance. Real estate is popping, rates headed down and ensuing carry unwind. AUD is a bug looking for a windscreen and it’s fast approaching.

    Reply

    • lighthousesecurities Says:

      Hi Chris…

      The AUD is probably going to struggle to get much through the recent highs of 1.07-1.11 anytime soon but the interest rate differential contraction is baked in the cake and the AUD has been outperforming for a while as it has with many of the other indicators. that of course sets things up for you suggested bug/windscreen impact but markets need to go off again i reckon for this to happen.

      Always a question of time frame – for the moment things look ok but an uncertain world should constrain the AUD

      cheers and thanks
      Greg

      Reply

Trackbacks/Pingbacks

  1. Europe IS getting their act together – in their TIME | Lighthouse Securities - October 27, 2011

    […] Australian Dollar is at 1.0490 looking like it just might be the little currency that might. The 3 year swap rate in Australia is up at 4.35 washing away the CPI induced rally and market […]

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