How Bearish should you be about the Australian Dollar?

April 10, 2012

FOREX, Global Macro, Uncategorized

How bearish on the Australian dollar, how bearish on equities, how bullish on bonds?

It’s an interesting question isn’t it? If it were May it would be easy – sell and go away as the old adage says. But April?

I’d posit, I guess O have been for a while now, that the broader market rally in risk assets needs a rest – either a pause that refreshes or a decent pullback in price. Let’s face it, this rally kicked off in early October after a pessimistic crescendo the likes of which we hadn’t seen since March 2009.

But after 3 years of Monetary stimulus, particularly quantitative easing, the cyclical rally is getting long in the tooth as is the shorter term one and to top this off the nascent US recovery seems to have forestalled QE3 – much to the chagrin of the liquidity crowd.

I saw a quote on this theme by Doug Kass this morning (ht to Prieur du Plessis @prieur on Twitter) which I agree.

Kass said,

Absent more easing, investors are going to experience natural price discovery in stock prices

Isn’t that an eloquent way to say he thinks priced are going down? I think it is.

Equally though China is giving the Bulls, let alone it’s own central bank, a little heartburn. Inflation remains an issue as we saw over the weekend – even if food was a big culprit – and the data today was good, in the sense exports were up and imports down, but also bad because it shows the economy is slowing more than anticipated by most pundits. For the record I’m a cyclic Chinese growth bear.

Markets in Asia were under pressure today and Bloomberg reported,

On the first day this quarter when all Asian markets were trading, the Bank of Japan kept its key interest rate unchanged and no policymaker proposed additional stimulus. China reported a trade surplus last month as import growth trailed forecasts, underscoring risks of a deeper slowdown. Federal Reserve Chairman Ben S. Bernanke said in a speech yesterday that the U.S. economy was still “far from having fully recovered” from the financial crisis.

“Investors are still fearful that growth isn’t strong enough and if there isn’t going to be more stimulus, then that’s negative,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors Ltd., which has almost $100 billion under management. “Investors are saying the recovery is fragile so either growth picks up or we get more stimulus.”

Shane Oliver has summed it up nicely not just for China but the US as well – growth isn’t necessarily weak but it’s too strong for stimulus so the liquidity addicts won’t get their fix.

Which brings me all the way back to the little Aussie Battler, the Australian Dollar.

Fundamentally the picture has soured a little if we look at the drivers.

First – the Australian domestic economy is clearly slowing from an already moribund state and if China is slowing them the rabid 10% might do likewise. So RBA to cut at least twice and Aussie bond spreads against the US and others to converge.

Second – if global growth is not great but not bad enough to generate more free money and liquidity injections then economic growth must support valuations. That might be a stretch so markets, equities, commodities and bond yields might, as Doug Kass puts it have some price discovery to the downside.

Third- risk appetite is waning for the above reasons and economic surprises are reversing and taking sentiment with them.


Check out this chart via Pragmatic Capital – sorry for poor quality as I’m in the car driving to Sydney – well Lisa is anyway – but you get the point and the link is here.

Which brings me too the Aussie Dollars technical outlook. Below is a chart regular readers will be familiar with and you can see the double top above 1.08 and the clear down trend – I retain my target below parity.

This second chart is a closet look at the one above. Still a downtrend but you can see how important the 1.0240 level is – its the last line of Fibonacci support bring the 61.8% tetra cement level of the last big leg up.

But as the Avid Chartist noted the other day this could be a staging point for a rally. Which is why I have circled the recent price action and MACD indicator. They are both a little confused but unless or until 1.0240 breaks and holds the Aussie Dollars demise is not a fait accompli.

Not yet anyway because as you can see above the drivers are turning against it and I retain my view of an eventual move below parity even if we get a little rally off this important support zone.

Have a great day

Gregory McKenna

Usual disclaimer folks – this is not advice, I haven’t taken your circumstances into account and you don’t have access to my stops or money management protocols.

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