AUD/USD – The Aussie should be lower, much lower

Oil has broken lower and looks headed into the 70’s in terms of dollars a barrel, copper likewise fell again overnight and seems poised for lower prices and gold also fell. The poor earnings reports we are seeing at the moment from bellwether companies is a clear sign that the global economic landscape remains fragile.

his is normally an outlook that would see the Australian dollar heading lower but as we wrote yesterday the Aussie remains the darling of offshore investors and as a consequence it is holding up much better than any historical comparison would suggest.

Ultimately though that is the key isn’t it – since the float in December 1983 any period of global weakness has been the usual old balance sheet recession which hit demand for Australian exports, or perceptions about them, and saw traders and investors downgrade the outlook for Australian growth. That is no different from what we are seeing now. But what is different is that the entire developed world is doing worse than Australia at present so the usual linkages between the Aussie dollar and a weaker outlook, lower copper prices or even rates in Australia still heading lower is broken.

Put simply the transmission mechanism  isn’t working because unlike other periods of global weakness over the past 30 years even against a weak global backdrop Australia still stands out as the foremost developed country in which to place your funds.

Many have questioned the sustainability of this. Many have tried and failed to short the Aussie – I’ve been caught myself a few times – but the buying keeps coming back and the Aussie sits above 1.02 when it really should be in the mid the low 90 cent region based on historical relationships.

What this says to me is that the RBA, if it is concerned about the Australian dollar not doing its usual job as a “shock absorber” for the economy is try to drive it down by cutting rates below 3% with an outlook for further cuts in order to drive a compression in the AUD-USD 2 year rate and thus take away the reasons to be long AUD for offshore investors. When or where the trigger point for the exit of foreign capital might be is a conundrum but it seems the Australian economy needs it and that the RBA is going to try.

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Looking closer to home it wasn't a great night trading for the AUD which rejected the 1.0335/40 zone we identified yesterday with yesterday's high of 1.0338 dropping to a low of 1.0230 for a more than 100 point drop. But for all the reasons outlined above it’s not exactly breaking wide open is it.

What is important for us is that the S&P 500 has today decisively broken the downtrend line we identified and our target using various methods is 1370/80. This is a big headwind for the AUD and I expect it to at least head back to 1.0150 range bottom and then if that breaks then 0.9970.

 

EUR/AUD – range bound still

The Euro came under pressure from the Spanish downgrades and the stock market swoon with the usual preference of traders for safe havens like the Yen and the US dollar knocking the single currency lower. From a high of 1.3075 Euro fell to a low of 1.2950 before rallying to sit at 1.2982 as I write. The technical set up is such that there is trendline support at 1.2937 but it seems that if the stock market sell off accelerates then it is fair to expect that the Euro's run has ended and its back toward the range low at 1.28 soon.

It might be hard to fathom why poor stocks centred on poor US company earnings and outlook help the dollar but it’s all about liquidity and safety. For all its warts and flaws the US economy, its currency and its bonds remain the asset of last resort for global investors. Equally at times of trouble US investors take their money home which also buts a bid under the US dollar..

For EURAUD its it is a competition to see who loses most ground in the equity sell off and Spanish concerns. The wedge formation suggests that a break lower is more likely than not and our trend indicators are still positive BUT fading.

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Shorter term I’m looking for a move to 1.2630 and then 1.2600/05.

It still seems to me though that unless or until EURAUD closes below 1.25 we are just range trading. Although

 

AUD/JPY – Stock sell off halts rally

The USDJPY breakout has stalled as the Yen caught a safe haven bid of its own and this pair was very quiet range wise trading only 79.69-99 in the past 24 hours as the competing US and Yen flows essentially cancel each other out.

The result was that AUDJPY was driven by the AUD side of the cross and its fall against the USD drove AUDJPY back inside the tentative trendline we saw break yesterday. If stocks are going to fall then this break was a false one.

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Interesting for me is that 4 hour charts have been long since 80 are likely to cut the long in the next 4 hour period with a trend change. Using the MACD’s I have sympathy with this signal for lower prices and I’d be looking for a move under 81 now at a minimum. For a pair that looked like it was headed toward 83 yesterday this is an important reversal.  

 

AUD/NZD – doing better as Kiwi underperforms

The downside that we thought might come for AUDNZD never eventuated yesterday given the NZD underperformed the AUD. This is often the case for this pair when things go awry in markets largely because the NZD is a much smaller currency and it only takes a few big positions to head for the exits to get an out sized move. It’s one of the reasons I’m not a big fan of short term trading this cross and prefer the long slow burn.

So we remain long and a believer that this cross is going higher in time. CPI in Australia today and the RBNZ announcement tomorrow morning will be important fundamental drivers but in truth this crosss is now hostage to the equity market moves. Watch out though if the AUDUSD breaks 1.0150 at some point as well.

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Longer term we believe that 1.2350/1.2550 is in a strong accumulation zone even though the downtrend remains intact, just, for now. We’d be long on a 3 month time horizon and a happy buyer and holder of AUDNZD.

Greg McKenna