Australian Dollar Weekly Wrap

See the latest Australian dollar analysis here:

Macro Afternoon

Another stellar week for the AUD, if you are a bull or long, and another new post float high and weekly close at 1.0738. The combination of a weak USD after the warning by Standard and Poors about the future of the United States AAA rating combined with solid terms of trade data and a general ebulllience in markets.

I would normally expect pre-holiday trading to be thin and after such a good run higher I would have expected a counter-trend move as traders and investors took money off the table. But that was not the case this week as many markets across the globe pushed sharply higher after a small hiccup on the S and P announcement. Earnings data out of the US also helps so-called risk assets as well, but interestingly not the USD.

There simply remains little reason at present for traders or investors to stand in the front of the market freight train and there are rumours of big buyers lurking. So with such a fundamentally strong backdrop for the Aussie sellers are scarce.

But the key here is that while the AUD is super charged against the USD a large part of this move is the USD itself and the weakness it has displayed. Remember that the USD is the other side of the currency pair and one of our 5 key drivers.

Indeed the chart below shows the trend in the USD Index which, I recognise is too heavily weighted to European currecnies, is in a deep dive. The current level of 74.108 is still 3.5 big figures or roughly 5% above the low from March 2008. At present there is little reason for the USD to find any material support above here.

For the AUD this means that even though it looks overstretched on some technical indicators and is probably a very crowded trade the fact the USD continues to weaken, along with all the other current drivers like interest rate differentials, strongish economy, China dividend etcetera countinue to drive the buyers and the sellers are probably waiting for an excuse to sell. This excuse could be the USD if it manages to find support soon but in the meantime AUD remains well supported.

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  1. ICANN accept what you are saying…..these are crazy, crazy times indeed.

    On a different but related thought…if this seemingly accelerating loss of faith in the USD continues, I do wonder if we would be looking at an attempted faith-restoring US Fed rate increase…? ….even with the debt millstone around their neck already…

    Debasement is one thing; loss of faith is another…

    • Deus Forex Machina

      I agree…its getting close to where the USD’s weakness (and SandP’s threat on the rating) will wake a few people up on Capitol Hill…at least I hope so

  2. Dollar Index Weighting

    Euro (EUR), 57.6% weight
    Pound sterling (GBP), 11.9% weight
    Canadian dollar (CAD), 9.1% weight
    Swedish krona (SEK), 4.2% weight and
    Swiss franc (CHF) 3.6% weight.
    Japanese Yen (JPY) 13.6% weight.

      • No

        There are other more important factors that are starting to bite at the Bernank’s bum .. he has achieved the goal of lower interest rates but has f%$ked up on everything else.

        Then again, the US voters seem oblivious to the fact that Obama, Geithner and the Bernank have no clue as to what the ZIRP and low U$D has on the international stage .. hence this bit of stupidity from Obama “President Barack Obama said on Thursday the U.S. attorney general was assembling a team to root out any fraud and manipulation in the oil markets that might be contributing to higher U.S. gasoline prices.”

        Then again they could be, problem seems to be globally!

      • No…

        …then yes…

        ie. initially no, for a multitude of reasons (not wanting to be stupid among them), but once the bond markets and stock markets start to turn down as a result, something else, maybe not “QE3”, and maybe not the same tact, will kick in.

        I just don’t think those pollies/Feds can simply sit on their hands and watch things turn down again. Why? Because they know that if they do, they’re headed for a severe deflationary depression.

        From their own point of view – and that’s the qualifier! – the should act again.

        From my own point of view, it just about choosing between a deflationary depression or inflationary/stagflationary-type depression – ie. they can’t avoid anything, but they think they can, so they act as only central banks can stimulate or produce new credit and money (OK, they could increase rates or reduce the money supply but that’s last resort before irreversible loss-of-faith in the currency occurs, due to the gargantuan debt-load).

        Just my thoughts 🙂

      • Im a NO then YES.

        I analogise US equity markets to be the crash victim on life support. Take away the life support and things are going to get nasty.

        Here’s my reasoning:
        1. Australia has vested interests influencing the govt, the USA has them CONTROLLING the govt, a true plutocracy (google “plutocracy”) this is evident by the naked hypocrisy in Geithner et al lecturing nations (eg China) on keeping their currencies devalued uncompetitively (and invasions of countries so MilInd comlex ca make a quid whilst tut tutting third parties that roll the tanks and jets). Rule of the few, by the few, for the few.

        2. 75% of the Dow volume is executed via Automated Trading platforms (remember “flash crash”) on behalf of investment banks and hedge funds and the bulk of the remainder is manual trading by the same.

        3. A turned off life support will see a DXY rally and falling equities and AUD (etc).

        4. Plutocracy factor will trigger QE3 and AUD could be then 0.95, Dow 10,000.

        5. Wildcards that can derail or overshadow QE3 is an European default or something catastrophic in the ME’s uprisings.

        Interesting times eh? Have a stop loss whichever.

  3. The concepts of ‘weak’ and ‘strong’ (or ‘supercharged’) in respect of currency exchange rates are absurd misnomers; especially to the people whose businesses and jobs are made vulnerable by an uncompetitive exchange rate.

    A so called ‘strong’ Australian dollar means we get more Australian businesses going bust, and jobs lost! American industries and those they employ, will be grateful for the fact that, thanks to their ‘weak’ dollar, their products are now more competitive at home and abroad.

    I suggest that anyone wanting to enthuse about the benefits of a ‘strong dollar’ would do well to read the Leigh Harkness letter read by Ian McNamara, ‘Australia All Over’, ABC radio, Sunday 7.29.43a.m. on 17 April 2011. ‘Macca’ couldn’t help but comment: “This is a good little analogy!” and refer.
    would do well to read the Leigh Harkness letter read by Ian McNamara, ‘Australia All Over’, ABC radio, Sunday 7.29.43a.m. on 17 April 2011. ‘Macca’ couldn’t help but comment: “This is a good little analogy!” and refer.

  4. I got to say below is probably one of the best comments I have seen on this blog about Australia from Lorax. Why so many Australians are bragging about the high AUD just baffles me. They just dont realize what its doing to the rest of the industries/economy. When China stops building empty cities, roads to no where etc then the AUD and Australia will be royally screwed. Australia will not have anything to fall back on.

    From Lorax in another post on here
    “The Lorax says: April 22, 2011 at 12:33 pm I’d hardly call it ‘balance’.
    We are only shielded while China wants our resources to build (empty) apartment buildings. The strong currency is not something we earned or deserved, its entirely dependent on the Chinese building boom.
    In the meantime we’re sacrificing our non-resources tradeables sector for no good reason. At $1.08 manufacturers are simply shutting up shop and walking away. There will be nothing but scorched earth left when the Chinese property bubble bursts, and we desperately need a source of export income to fill the void left by mining.
    I am in no doubt we will look back on this period in the same way the Irish look back on their housing bubble today. How could we have been so stupid to put all our eggs in one basket?”

    • I do not disagree.

      The question is when?

      I think China has a good kicking record and the can is down the road.

      Listening to the BBC highlighted an important issue in that the ‘richest’ business people in China, all made their money from internally NOT from exporting. Consumer spending on real estate and other items.

      This is an important issue and the increase in real wages, development of the nouveau` riche and a sizable middle class will test a lot of Michael Pettis’ theories on a soft landing through increased consumer consumption (amongst other things) ..

    • LBS: Thanks for the kind words.

      Furthermore, when economic conditions continually punish innovation and hard work, and reward laziness and speculation, the long term outcomes will be dire.

      Whacked: The consumption share of GDP continues to fall in China. In other words, investment is growing at a faster rate than consumption. There is little chance of China becoming a consumer-led economy anytime soon.

  5. I just hope this currency war with all these countries doesnt put us all back into a deep recession. I believe QE is just a way to reduce the value of the US currency and send the US inflation over to the Asian economies. Looking back on this time I believe alot of people and Bernake are going to be saying what in the hell was he(Bernake) thinking.

  6. wonder how much of the AUD price is carry trade were they borrowing for free from the FED and buying stuff to make free money? Hope we dont see a brutal 30c drop in a few days in the future.

  7. Has anyone established that the FED isn’t ‘selling off’ dollars or otherwise setting out to achieve a competative exchange rate?

    • Deus Forex Machina

      You could argue, I would, that thats what QE is. Flood the market with a product for any given level of demand and the price will fall. Thats what QE has done for the USD. The flip side is inflation. Things demoninated in the USD have risen in large part because of the weakness of the USD. US equities, commodities and other currencies. The US is definately using currency as a weapon to dig them out of their economic hole. They have done it before (Plaza Accord I think)and they’ll do it again.

      • DFM “The US is definately using currency as a weapon to dig them out of their economic hole.”


  8. This latest “bull run” in the AUD and the “current weakness” in USD seems to aligned in the stars with the Japan tsunami disaster. The commodity story is nothing new and neither is the inherent weakness in USD. What has fundamentally changed in global markets since the tsunami?