Aussie Dollar at risk from the RBA

See the latest Australian dollar analysis here:

Macro Afternoon

I haven’t posted much trading style stuff recently as the Aussie has been trading a range and I’ve been away from the desk often on business but for those with a trading bent today offers a potential opportunity.

As you can see from the chart above last weeks move from just below 1.04 (range bottom) peaked below 1.08 (range high) and is slipping back toward 1.07 as we write.

Yesterday’s data was terrible for the Aussie as it takes away any chance of th RBA hiking anytime soon and speaks of an economy that is clearly slowing.  The Major Bank senior economists are all largely walking away from their calls for rate hikes and pushing into the nether region of 2012.

So, that’s 2 of the 3 drivers in our model now negatives – or potential negatives.

Equally the AIG Service Sector PSI just out showed that this sector of the economy remains sluggish.

The importance of this run of data is that even though we, here, have been talking about it for a while now and rebutting some of the more ridiculous talk of a booming economy the weak data is now only really gaining acceptance and noteriety in the MSM or the Punditary and with investors and traders.

Late to the game they may be, but this has an impact on Aussie related sentiment that is only related to the Aussie (IE not related to USD weakness or EUR strength). Which undermines the Aussie, all other things equal.

But this is largely a technical view based on the price action and the fact that the RBA could be expected in the Statement at 2.30 pm today to reflect the recent deterioration in data, even if I’d posit they’ll be more upbeat about the Greek resoultion.

So a Dovish RBA today could see the Aussie under pressure. The blue line on the chart is at 1.0675 and represents a potential hourly head and shoulders. If it breaks I’d expect a to 1.0540 probably lower.

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This blog is for information only and does not constitute advice. Neither Greg McKenna, Lighthouse Securities nor MacroBusiness has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

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Comments

  1. Greg,

    Is it possible to buy an option which gives you the ability (but not the obiligation) to purchase USD at the current AUD rate at some future date. A hedge as such.

    Curious about this option, as I want to move more money to the US over the next 12 months and to lock in a rate now might be a good idea.

    I understand that any comments here come with the usual disclaimers etc.

    Your thoughts?

    cheers
    Darryl

    • It’s possible but you will pay some money for it. they are not cheap.

      There are some zero cost options such setting a rate between X and Y which do involve no cost. For instance if today the exchange rate is 1.07 you can buy an option to exchange between 1.04 to 1.10 at no cost. These options are available via retails banks but usually for large amounts e.g. 100k +

    • Deus Forex Machina

      Yes, absolutely you can.

      The key is what spot (or dealing) rate you want to use.

      The 12 month AUD/USD Forward rate is spot – 474 pts today. So around 1.0225 or somewhere near that.

      That would be called an “at the money” ATM forward.

      This lower AUD/USD rate in 12 months reflects the fact that FX Forward theory seeks to equalise interest rates between the countries of the cross. In this case its Australia and the USA and there there is about 4.5% difference in the rates hence the forward points.

      If you wnat to hedge a higher rate, say 1.10, it is called “in the money” (ITM) and if you want to hedge say 0.95 (that is buy USD sell AUD in 122 months time at 0.95 it is called “out of the money” (OTM).

      The price will be determined by a few things with the main ones:

      >>>Time to Expiry – ie 12 months
      >>>Proximity to spot (ATM is cheaper than ITM but dearer than OTM)
      >>>market volatility – higher vol means higher cost because the chance of the trader getting exercised are higher and the costs of hedging also higher

      And this all ties together into a price – it can be expressed either in terms of percent of the trade, points or straight cost. My preferred method is % of the trade.

      In terms of how you do it that is very much dependant on whether it is in your personal name or in a business name.

      If it is business then you should talk to your “banker” but personally you can also go into the CBA or the other Majors but they will have credit and size limitations on what you can do…for example the CBA would only go down to 25k according to a mate of mine just now.

      Also there is a company called OZforex that can probably help you. I don’t know them that well but I used to know the founding partner really well when I lived in sydney and they seem to be ok I here although I have not used them.

      so there are lots of things to think about and many competeing forces and a lot of homework to do.

      but the simple answer to your question is Yes.

      • Thanks guys,

        Really appreciate you feedback on this (and the excellent FX blogging on this site as well).

        We currently have an OzForex account and have used them when ever we have transferred money to the US in the past.

        If you are just your average mug like me, I would recommend them highly. Simple to set up and painless to use. And much better rates than the banks will give you (and much less hassle as well).

        I should have thought to look at their website first. I suspect my plan may not be economical, given the small value (well, big for us, small for the market) of around AUD$10K-$15K vs the cost of holding the option.

        Time to do some research.

        Many thanks
        Darryl.

  2. Flipside is, a move back over 1.075 could be a good buy, at least for those for those with a short term view.
    Never can tell in advance how the market will react to any anticipated news item. Today could be a case of “buy on the (bearish) news”, in a similar way that we often see “sell on the (bullish) news”.

    • Deus Forex Machina

      yep…always the risk…

      should have said that if 1.0675 holds and it takes out 1.0750 we get a little old run…

      but thought that might have been a bit too much like an economist

      on the one hand other hand

      • Which US president said he wish he could find a one-handed economist?

        😀

        e.g “Well Mr President, we could spend a bit more here to stimulate the economy, but on the other hand, we could cut taxes”

  3. ps. I think we only get the meeting outcome today (ie. rates decision), and the statement follows some days later? Often the statement is more of a market mover than the decision.

    • Deus Forex Machina

      yep…volatile beast that one…stopped trading it in 1990…the trend is effectively flat,at the moment, so I wouldn’t expect a big outcome but the standard deviation is pretty big so it is often a turkey shoot.

      the reaction will depend on where the aus is in the run up and how the market is slanted…should be good for a 50-100 pt run though if you get it right

      i’ll pass, too hard 🙂

  4. Where to for the AUD – EUR exchange if rates stay on hold…??? Also taking into account the ratings agencies ready to call the Greece debacle for what it is – DEFAULT!!!

    • Yes, the politics and ‘behind the scenes’ machinations on this whole Greek issue is just fascinating, even to someone like me with a limited understanding and eduction in global economics.

      In someways it is almost child like. If I refuse to call it a default, then the default doesn’t exist.

      I cannot see anyway Greece can get out of this. The long they leave it, the more pain it is going to cause it seems.

      And the bigger the mess.

    • Deus Forex Machina

      longer term my personal view is the EURUSD is worth no more than 1 so I have a bias here…

      but in the short term if the ecb tightens and we keep getting weaker data then aud/eur is under pressure…

      btw…it is just on the trendline from dec 2008…hasnt broken and this is a could line but something looks like its going to happen in that cross…maybe rota or avid could give a view???

      • Sorry could you clarify that….You believe the Euro is not more/less than 1 AUD ?

        I know the Germans would prefer a weaker Euro for trade, and when you look at some of the nations that carry the strong global currencies you have to scratch your head and wonder why they are so strong.

        • Deus Forex Machina

          SORRY…HUMBLE APOLOGIES

          I meant the EUR/USD exchange rate in my view long term is worth only 1 for 1 with the USD so that implies if the AUD holds up ok in time the AUD/EUR will rise from here…but that is long term

          Germans are probably ok with EUR mid 140’s and below at present though.