Industry Founders as Australian Dollar heads higher

January 24, 2012

FOREX

Yesterday Alan Kohler wrote a piece saying the Aussie is being buoyed by people using the Euro as a funding currency. Last night Nouriel Roubini wrote a piece that said notions of the Euro as a funding currency are bunkum. I tend to agree more with Professor Roubini than Mr Kohler but as I wrote back on January 5th the Aussie Dollar maybe just doesn’t have a choice except to appreciate given that,

if the Swiss national Bank doesn’t want Switzerland to be Switzerland than perhaps Australia has no choice.

But the currency is certainly biting hard into Australian industry and I wholeheartedly agree with Australian Industry Minister Kim Carr when he says that Australian business continues to need assistance from the Government. the float of the Australian Dollar has served our nation well over the last 28 years. It worked as a natural shock absorber both to the up and downside which made the RBA’s job of managing the economy all the easier and gave us a much more stable economic growth profile. My personal belief is that it was the currency that is in large part responsible for our 22 odd year unbroken run without a recession.

But as I’ve been writing for some time now something has changed. That something is simply that Australia and our currency is just one of the best risk adjusted currency bets on the planet at the moment and so people continue to pile in. 

In truth though what else would you expect  in a world where government’s are manipulating their currencies lower and central bankers are keeping rates as close to zero as possible and in a world where Sovereign governments remain under intense fiscal and debt pressure – Australia simply stands out. Australia is clearly one of the strongest AAA rated Sovereigns on the planet, it has relatively high interest rates, has a relatively low fiscal balance and low debt levels by global standards and even with the Household retrenchment we have been writing about for ages the mining boom continues to roll on unabated.

So Australia is a beacon in a dark world for investors. 

As a result of this the Australian Dollar remains the darling of the investment community and has been sitting above parity for the best part of 12 months now. But that period is long enough to bite into industry and start to change investment and operating plans for business. And so it was over the past 24 hours that Toyota announced that it will be reducing its workforce by 350 people at its Alton plant in Victoria – that’s a little more than 10% of the workforce. As it stood last year, according to the SMH, Toyota produced 94,000 cars last year,

“exporting about 60,000 of them mainly to the Middle East and 13 other smaller overseas markets.But those figures are almost 40 per cent shy of the company’s peak output of almost 149,000 cars in 2007.”

Clearly when you export so much of your product a currency that the punditry told you would only be temporarily above parity which persists at such a historical extreme level is going to hurt your export sales – the high Aussie just makes your product so much more expensive in the currencies against which you have appreciated. So, like other businesses, Toyota is forced to  look at its costs and reduce them – the easiest way is to reduce workers which theoretically are a floating, not fixed cost, in order to keep the rest of the workforce in place.

And so it goes, whether its Toyota, Heinz or other businesses the high Aussie is a drag on the economy when the domestic economy is already slowing down at 1.05 and change it’s still too high.

But along with a number of other markets the Aussie has broken higher this month, taken out the top of down trend channels and is set up to challenge the mid 1.07’s perhaps even all the way back to 1.10. Lets have a look at the charts.

Long Term – Weekly Chart 20 years

You can see in the chart above that the Aussie is in an up trend – it is somewhat tenuously drawn given I have fitted the lines but overall it still hasn’t even had a 38.2% retracement of the move from the 0.62’s where its rally began after the crash of 2008. 0.9250 was the big level when the Aussie fell last year but real money buyers lurking above their chased it back – a little bit of a market bounce helped too but nonetheless long term technicals its still strong.

You can see this in the chart below which covers the weekly moves over the shorter 5 year time span.

Daily for the past 2 years

Looks like the Aussie has broken out of a nice big wedge and has moved above the 200 day moving average, and crucially held on both a daily and weekly close, for the first time since September last year.

Trading wise the outlook is also positive because after failing initially last week at shorter term resistance the Aussie has broken and held on a weekly and daily basis. It’s broken short-term downtrend resistance and broken back inside the bottom of the previous up trend channel. Equally my Bollinger band strategy has it still in an uptrend even if the MACD feels a little overcooked. Huge support in the 1.0380/1.0420 region on any pullback.

Positioning has increased materially as you can see in the chart above from Bloomberg and the CFTC on futures traders but it is not at extremes so, in this sense, positioning is not an impediment to any further increase in the level of the Aussie.

Yesterday when I wrote about the Euro Bounce , which fortuitously occurred overnight (I’ll take my luck when it comes ) I also said the Aussie’s close had been really strong as well. There in lies the rub – over the past 3 months the Aussie’s correlation with the S&P daily has been 0.91 (direction of price moves) and a lower, but still substantial, 0.80 with the Euro and European credit spreads and markets such as Itraxx.

So this is still a risk based rally but one that I think still has some legs.

For traders this is good news, the trends look like they have legs and as we all know the trend is the friend and all that. But for Australian industry, Toyota workers, Heinz workers, Aluminium workers in the Hunter and others yet to fall, the persistence of the Aussie’s strength is changing our economy. For mine this is a long run negative for the economic outlook as it narrows the biodiversity in the economy making it weaker by making it more dependant on what is left.

We are unlikely to fix our currency in the way that many others are, either explicitly or by stealth, so I agree with Kim Carr. Let’s work out what industries are important and subsidise them – surely its analogous to helping farmers in a drought. The Aussie won’t always be so high, but I fear it might go higher yet, so let’s try and keep as diverse an economy as we can. 

www.twitter.com/gregorymckenna

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

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