Australian Dollar Medium Term Outlook – YoYo trading, back below parity?

March 29, 2012

FOREX

Up down and around the Aussie Dollar goes and after a big fall then a bounce last week the Aussie failed at resistance this week and is now, once again is approaching support.

I’m going to make a big call and say that on the basis of my fundamental economic view and particularly on the basis of my technical view the Australian Dollar is going to head under parity, probably toward 0.99 perhaps a little lower.

I don’t know when but it just feels that way to me.

Anyway leaving aside that feeling that came to me last night while I was thinking about the Aussie Dollar let’s  have a look at the outlook.

The first thing to say is that the Aussie Dollar based on the usual drivers is around fair value. I asked on of my old colleagues from NAB what he thought so-called fair value for the Aussie Dollar was earlier in the week and he built a quick model, or two, which is summarised below,

The first chart (model) is since 1995.  It puts current fair value at 1.05.  A very standard AUD specification – interest rate diff, commodity index (CRB industrials in this case), VIX, and gold.  Does an OK job.  R2 84 and 5.4 cents is 1 std dev.  Fair value now 1.05.

Chart (model) 2 is since 2005.  Same result but better fit.  R2 94 and 2.7 cents is 1 std dev.  Fair value also 1.05 cents

The interesting thing, really interesting thing, about both these models is the degree of fit that they show between what you might call a theoretical valuation and the market price. As Peter said to me,

the better fit in recent years argues that markets better understand what the fundamental drivers of the AUD/USD are. Since early 2008 we’ve been fairly close to fair value.

Yep, it is hard to argue with that on the evidence above.

Which is really interesting isn’t it – it’s one of the reasons the RBA essentially has no interest in suppressing the Aussie Dollars rise. They think is essentially is trading where it should on fundamentals. You all know my view on that and the fact I’m for assistance for Australian business but that is for another blog.

So if the Aussie is arround, indeed this morning probably under, fair value why am I getting bearish?

In truth if you use my 5 drivers, which are very similar to the model above, you’d have to say I’m deviating from my own model by having a jaundiced outlook for the Aussie.

It’s hard to have any credibility with myself given the way the Aussie and has been tooing and froing recently but I guess the easy answer is that I think that we have entered a strong downtrend for the Aussie, an uptrend for the US Dollar a period where commodities will be coming off and with all of that investor sentiment or risk appetite as well.

All these things would feed back into the model and give a lower fair value if I’m right.

This is a key point – Fair Value indicators are co-incident and change as the value of the inputs into the model change.

You can of course have expected fair value but it will be based on best guesses for the inputs at some time in the future. It is the ability to get these best guesses right which has helped the Currency Strategy guys at the NAB be amongst the best forecasters for a few years now.

So to the charts –

Here is the Aussie daily – key point here is that it failed at downtrend resistance even though we posited it might try to kick on earlier in the week. This reinforces the downtrend, which with the double top you can see suggests a deeper pullback is in the offing – at least technically. But for the bears to take the upper hand we’d have to see a daily and or weekly close below the key 1.0370-80/1.04 zone. It might happen this morning.

I know I’m out on a limb here and I can see a counter bullish argument that says the Aussie is coiling for a break of the downtrend line and a rally back toward the 1.07/1.08 region, perhaps even beyond – let alone the reality of where fair value.

One bad night on global asset markets doesn’t make a trend so  for the moment the Aussie is still a range trade, we know where the top is we are just searching for a medium term bottom. But my sense is that the Aussie Dollar is one of the most “owned” assets in the world and while the recent ebb and flow has really just been about positioning, trading and risk appetite globally, medium term it just feels to me like it needs to test lower still.

BTW: one of my systems is still short Aussie Dollars – we’ll see hey!

Have a good day

Gregory McKenna

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 or needs.

If however you do need advice on Investments, Economics, Funding and Liquidity, Interest Rates and Forex and Derivative markets 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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3 Comments on “Australian Dollar Medium Term Outlook – YoYo trading, back below parity?”

  1. The Blissful Ignoramus Says:

    “I’m going to make a big call…”

    I hope your call is right. And soon.

    Reply

Trackbacks/Pingbacks

  1. Australian Dollar Debate – up OR down? | Lighthouse Securities - March 30, 2012

    […] piece yesterday where I declared myself now a bear on the Aussie Dollar in a medium term sense expecting it to […]

  2. The Australian Dollar remains vulnerable | Lighthouse Securities - April 5, 2012

    […] but it continues to remain vulnerable and I remain committed to my view it is going below parity as articulated recently when I said, I’m going to make a big call and say that on the basis of my fundamental economic […]

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