Australian Dollar Weekly Wrap

See the latest Australian dollar analysis here:

Macro Morning

A big week for the AUD as risk finally went off and the AUD tumbled 600 points from the high of the week to finish at 1.0442 in New York this morning. Anyone who talks of safe haven buying now should have to pay these 600 points to charity. On a million dollar AUD position that 600 points represents a loss of around $50,000 – and no one trades in millions. The positions are much bigger than that.

Just to be clear the AUD still held the really important 1.0390 support we talked about yesterday on a daily close basis. Intraday traders might have sold the break overnight but they would have been flipped out pretty quick as it was a volatile night. So it hasn’t wiped itself out yet but there is a difference between safe-haven and rerated that is really important.

That distinction is that re-rated implies a little bit more positive sentiment when things go bad so traders and investors don’t bail out quite so quickly but they still bail out. it also implies that this more positive sentiment means they might come back a bit sooner, thus bringing up the bottom from the 60’s to the 80’s next time it crashes.

Safe haven on the other hand implies that when things go awry in markets and in economies an asset appreciates. That is what safe-haven or safe harbour is – its all about protection. On the safe haven hypothesis the AUD should have rallied this week not sold off 600 points.

The chart above is of the AUD/USD, EUR/USD and CHF/USD (I’ve inverted it so I can get the same normalisation). They are indexed to 100 as at earlier this week and it is a 30 minute chart. Note the performance of the latest addition to the ranks of the safe-haven club which is the AUD and the white line – down all week.

In the chart above I have added gold, in USD per ounce, and you can see that it and the Swiss Franc, green line, did their job in this week’s crisis – they protected your capital. they were a safe haven.

Now, in this final chart I’ve added the red line which is thhe S&P 500 futures. Note how well our newest member of the safe haven club matches this global bellwether of risk.

As I’m writing there is news and debate coming out of the US that S&P has told the White House they are going to downgrade the US from AAA to AA+. This news hit in late trade this morning and even though the White House is apparently pushing back, it seems that we’ll get another week next week to judge the AUD’s safe haven status.

Oh, and the true measure of whether the AUD safe haven status has any legs – AUDCHF – has fallen 10.24% this week.

Have a great weekend and good trading.

Greg McKenna

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Comments

  1. Precious Bodily Fluids

    The other overlay that would have made nice viewing is US debt, say 10 yr treasuries. Gold and CHF held there ground pretty much but the true safe haven, US debt, rocketed. …notwithstanding the stupidity of a supposed S&P re-rating.

      • Precious Bodily Fluids

        Hadn’t seen that. Been in and out this morning and seen some stories floating that this would happen. Agree with Ritholz. He’s been on their case for a long time.

        These clowns are supposed to be rating sovereign risk. There is an admitted political sovereign risk, i.e. a risk of refusal to pay its debts, which realistically while real would be temporary, but there is no financial sovereign risk.

        And we saw where investors want to be when the shit hit the fan this week: there was a stampede into treasuries. The market says that owning US debt is the safest thing out there.

        The interesting thing to watch now is whether Congress introduces bills to chance investment laws. My understanding is that pension funds and similar are mandated to buy AAA (which made a these corrupt organization giving subprime AAA all the more insidious) so we might see funds leaving treasuries. Doubtful this would ever balance the inflows due to the flight to safety and trade deficit though.

      • If there is a scramble for US dollar from people selling their US Treasury for cash, the shortage will cause the Aussie dollar to go down even futher. (Something similar occur during the GFC.) The downgrade will introduce politics into QE3, and reduce the chance of it occurring. This is financial vandalism.

          • Deus Forex Machina

            Hi Guys…sorry…been riding round the port stephens bush on an 8 year old party

            I cant imagine that traders will do anything other than sell usd…it impacts inverstment managers who can only buy triple A so that will get smashed..

            swissy and eur will rally, other triple A nations should also benefit so AUD might be supported but get smashed against swiussy and eur for example

            but if panic ensues then aud will get smashed as well…but remember that AUD/USD is aussie in terms of usd so it may actually no go as low as you expect…i still think 0.97 and then we’ll see

          • Precious Bodily Fluids

            DFM,

            I was wondering about the legal requirement to buy AAA as well but the Fed released a statement which to me says business as usual w.r.t. the rating of treasury risk:

            http://www.federalreserve.gov/newsevents/press/bcreg/20110805a.htm

            Also since I believe that the national debt rating is supposed to be the highest in the land (e.g. you can’t have MBS at AAA if treasuries are at AA+) this would mean that no other US based savings facilities exist for purchasers of AAA debt. So if that is the case my reasoning is that the legal mandate, if it exits, would have to be altered to read “you must buy paper equal to whatever the US debt rating is” rather than “you must buy AAA”.

            Additionally Moody’s and Fitch haven’t moved (yet) so treasuries are still AAA with them.

  2. I dont think the AUD will go much lower than 1.02 without oil tanking, no 1 knows for sure. Feels like a repeat of 2008 could come.