AUD longs accumulate ahead of key event risk

Since Monday we’ve seen the Aussie stumble over two big figures, climbing further towards the overbought levels according to its relative strength (RSI) over a 14-day period.

Today’s domestic GDP data more than appeased expectations with the economy growing 0.9% in the third quarter, or 2.5% on year. Digging a little deeper it’s particularly positive in light of the strong growth in both resource and services exports, in part, courtesy of the lower exchange rate. So with a couple of good data points under their belt (and no January meeting), rates pundits can actually take the time to ‘chill’ for a while now as suggested by Governor Stevens recently.

Still, we did see the local unit move a little lower in the ensuing period – with some suggesting a bit a profit taking was the a good enough reason. This morning RBA Governor Glenn Stevens spoke in Perth. Read the speech at the RBA website or takeaways at the SBS website.

The question remains; are we seeing a meaningful inflection to the upside, or a precarious rally built on no much other than a few data points and a bit of luck courtesy of the US dollar? If we look at what’s behind the AUD’s rally, it appears to be the latter. We’ve have solid export data yesterday and nothing much new from the RBA accept a reasonably upbeat statement and the willingness to step in and cut rates if required. There’s also some unwinding of long dollar positions given some less than inspiring manufacturing data out in the US overnight. This US dollar weakness may be the product of some ‘rebalancing’ ahead of key event risk on Friday – Nonfarm payrolls.  In other words, markets participants have cold feet and AUD shorts (bets on further rate cuts) and USD longs (Bets on rate hikes) are moderating.

This ‘pricing in’ or consolidation ahead of key event risk such as Fridays NFP’s is important for those looking for a meaningful US dollar rally. That is, the more moderate the expectations in the lead up it would be reasonable to expect subsequent selling to be moderate, but the greater the rally if the data beats expectations.

Looking closer at Tuesdays US data, the ISM manufacturing index fell to 48.6 in November – the lowest since 2009. A level below 50 indicates contraction. The finer points of the data indicates new orders and prices paid are lower, but the employment sub-index moved firmly into the positive at 51.3 from 47.6.

All of this of course is in context of interest rates, and the stronger the data the greater chance that the Fed will increase in December.

Overbought? A$ finds form ahead of key event risk