Die AUD Die

An interest rate cut didn’t do it. Weak economic data didn’t do it. What will it take for the AUD to fall? Traders at investment banks are largely expecting a fall in AUD, based mainly on the drop in Australia’s terms of trade – but nothing seems to knock the AUD down.

When the Reserve Bank of Australia starting cutting rates in November last year, the AUD/USD was trading around 1.0600. Now, 13 months and 6 rate cuts later, its around 1.0500.

Economic data since the start of the month is also weak. Retail sales, building approvals, company profits, current account and GDP numbers all disappointed. While jobs rose, the increase was in part-time postions. Admittedly, data out of China and the US is better than expected (supportive of “risk currencies” like the AUD), but the local data appears to have had no impact on AUD strength

Talking  to FX spot traders, FX Forward traders and FX Option traders is enough to have AUD bulls reaching for the knife. Over the next 3-6 months, they are almost universally bearish, with many looking for AUD/USD levels around 0.9300 to 0.9500. Their argument is based on a fact highlighted by the RBA – Australia’s terms of trade are down 15% from the peak, yet the AUD is less than 6% below its corresponding high point.

Yet the AUD still won’t fall. Have a look at the charts:

AUD/USD Daily

20121210 audusd

Source: CMC Tracker

Note how close the pair is to the top of the triangle at 1.0488. Trading through 1.0500 would very likely spark technical buying. And its not just AUD/USD:

EUR/AUD Daily

20121210 euraud

Source: CMC Tracker

Note the cross in the two week vs two month exponential moving averages. And the breach of support at 1.2367.

This is not my trade. The fundamentals and technicals are pointing in different directions. However, the persistent strength of the AUD, and the chart patterns developing, could see technical traders Buy AUD/USD and Sell EUR/AUD.

About michaelmccarthycmc

Chief Market Strategist - CMC Markets and Stockbroking Regular on ABC, BBC, Bloomberg, Channel TEN, CNBC, SBS and SKY
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3 Responses to Die AUD Die

  1. Looking at the risks and the extent to which some markets are subject to unsustainable dynamics, the truth is the AUD is quite a good bet. Little wonder with a non zero cash rate, relatively benign public debt position and the fastest growing region of the planet at our doorstep.

    The fact many are looking at fundamentals and wanting to sell the AUD belies the strength of the dynamics of those very dynamics in supporting the AUD. Global demand is in a funk and public policy is fully focussed on lifting that demand by reflation (massive budget deficits and QE) and to the extent these policies fail underscores the likelihood more deficits and QE will be forthcoming increases, to the extent they are successful, means reflation is occurring and thus supportive of our terms of trade and national income.

  2. Vlad says:

    Well, then we should be proud that our Aussie dollar is the third most valuable currency in the world, despite everything, and even overtakes the US dollar. It is a kind of “oi-oi-oi” moment…

  3. KonJ says:

    Just as the equity market continues to value yield in the absence of growth, current holders of AUD seem happy to hold the carry for yield for the time being. CFTC COT data suggests large funds hold a record net long position in AUD so the buying may be close to exhausted but we aren’t seeing a lot of selling pressure… Yet. Notwithstanding the next black swan, be cautious around 1.0578 where commercials were heavy sellers in mid September. In the mean time the somewhat benign euphoria which might ordinarily allow for a tight stop on the carry might be thwarted by erratic moves characteristic of the low volume silly season.

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