How low will the Australian dollar go?

See the latest Australian dollar analysis here:

Macro Afternoon

The Australian dollar fell precipitously overnight and as I sat down earlier this morning it was actually trading under 0.9700. Remembering that earlier this week the AUD was above 1.03.

This is not unexpected to our readers and while I don’t want to turn this into a trading blog it is worth having a look at the price action to see what is ahead for the AUD:

As you can see in the hourly chart above, the AUD’s move down to the 0.9994 region we had saw it find some support. But once this broke it made a swift run down and through the 0.9900/50 region we also identified as support, but it kept accelerating to the downside. The red bars show just how relentless this fall was overnight before it found some support in both a slight reversal in equities. But equally, I would guess, given the speed of the fall, the AUD probably got some help from our friends at Martin Place.

The question for traders and investors is where will the AUD’s fall stop?

The lesson of 2007 and then again in 2008 is that the AUD’s life is not its own and if markets continue to fall so will the AUD. Indeed the AUD has broken the uptrend from the low at 0.8083 in 2010 and the start of this bullmarket back in 2009 [ EDIT: I just noticed I wasn’t clear and have adjusted this to reflect that the trendline break was a 2 year break not a 1 year break] and a break of 0.9700/10 which is the March low from this year from where the AUD kicked higher to the 1.10 region would confirm a double top at 1.1000 and open the way much lower – probably 0.8765.

But there is a lot of wood to chop first and last night’s low at 0.9693 bounced hard so we’d say this level held on the dailies. There is also a support line at 0.9660ish which you can see in the chart below. This is one of my favourite things to do – that is, take an old top and run it through a subsequent bottom and then leave that line there as potential support. It’s one of my favourite things to do after Fibonacci extensions:

So from a technical point of view I would say if AUD falls through the 0.9650/0.9710 support zone it is a shot duck.

But it’s not alone – this is finally a real risk off event – as you can see in the chart below. Any notions of safe haven, constantly repeated by part time FX commentators can now be put to bed once and for all:

Fundamentally nothing much has changed from the weekly two weeks ago – other than that the key drivers are getting worse.

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities 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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  1. Such a sudden and large drop in the value of our currency is really alarming. What do the international markets know that we don’t?

    • International markets don’t know anything that we don’t. They know that the IMF/Fed have abandoned their ‘Don’t mention the recession’ mantra and hopped onboard the ‘abandon ship’ ship. No QE3 for timing being means USD won’t be beaten with another round of dilution just yet, and markets are free to pound the sweet virtue out of the eurozone (note: the fall has been arrested by further pledges of action from European leaders/G20).

      The Aussie’s slide was especially precipitous owing to manufacturing data out of China yesterday.

  2. Well, yes, but I don’t think its something they know that we don’t.

    The MSM chest beating over the AUD’s “safe haven” status, which came to a mighty crescendo a few days ago when the Pascometer declared the dollar safe (thereby indicating its imminent collapse), is simply gibber gabber.

    The dollar isn’t a safe haven, it was never designed to be a safe haven, it’s a risk asset that rises with global growth and falls when in it’s in question.

    Which is good, because it acts as a shock absorber. The MSM view of the dollar is beyond ignorant. It’s dense.

  3. “Those who think the Australian dollar or the Canadian dollar are some sort of safe haven will find out otherwise.

    China is in a credit bubble and when it pops it will take commodities and commodity producing currencies down with it.
    Australia’s property bubble has already popped, and a commercial real estate implosion will follow with a lag, just as happened in the US. Canada will join the implosion party as well.
    The Canadian and Australian central banks will respond with liquidity measures or interest rate cuts, sending the currencies lower.

    There is no reason to like the Euro, the Yen, the Australian dollar, or the Canadian dollar.

    For that matter there is no reason to like the US dollar except things are about to get worse than expected everywhere else. That coupled with a messy default setup in Europe and a Fed that did “less than expected” on Wednesday are sufficient reasons to expect a rising US dollar.”

    The RBA rate cut will be a biggie. Goodbye 0.90….

  4. Adam Carr goes into meltdown this morning…

    It was just sheer and unadulterated panic overnight. The fallout from the FOMC meeting continued and global markets were smashed.

    Barely a day or two into things and Operation Twist has already wreaked havoc on the globe (although a stronger US dollar is good). The fear now, following the Fed’s increasingly desperate and useless actions, is that there is nothing left to stave off global recession.

    Now, at the moment we are not seeing any evidence of global recession. Growth by and large remains healthy, although clearly with the Fed just doing what it does, European politicians dithering and the constant media bombardment about crises and problems – many of which don’t even exist – the risks have risen markedly. The ‘crisis’ – pick one – has developed its own momentum; it is becoming a self-fulfilling prophecy, which of course makes it much more difficult to deliver solutions.

    These people had been arguing that the high Australian dollar was hampering growth, restraining it and contributing to tighter financial conditions. For consistency then, the weaker dollar must, on their own arguments, reduce the need for the RBA to cut. It will be interesting to see what happens on that front. As I noted yesterday this, at the least, should be a period when our exporters are hedging aggressively. If the Australian dollar goes lower still, then happy days, but if it goes higher, there is no excuse for whinging.

    Straight-jacket time.

    • I swear, the guy trots out the same arguement every time – it’s just negative sentiment, it’s self-inducing, we just need to wake up and smell the sunchine, it’s all in the mind, blah blah blah.

      No, the roof above your head is not burning. That smell and all that black smoke means you’re just in the wrong state of mind – all you have to do is BELIEVE and all shall be fine…

  5. So does this mean we can all now agree that it is not (and never was) mining and the lack of a sovereign wealth fund that is controlling the dollar?

  6. Mad Adam is a disgrace. He has predicted the opposite of everything that’s happening. He is misreading and distorting what is happening right now. He’s gotten the economy wrong all year and now he reckons a falling Aussie, resulting from a forthcoming Western recession and burgeoning financial crisis, is no reason to cut rates.

    It is astounding that he is in a position to influence people’s financial decisions.

    • +100 (seasonally adjusted)

      On Twitter this morning he says:

      sheer stupidity is driving this crisis. The Fed, politicians and irresponsible media.

      And says there is NO evidence of a global slowdown.

      I’m not attacking the man (for those who want to accuse), but the profession of economics is in dire straits and there is ample evidence of that. More than ample.

      • But even within a profession based on dodgy assumptions and ideology people like Adam Carr stand out given that he apparently has never seen a set of data that wasn’t bullish.

      • That’s why I’ve compiled a list of “economist” based contrarian indicators Dr Nick. It’s not about attacking the man, just his (or her) ideology.

  7. Straight-jacket time.
    Mad Adam is probably blogging in a padded cell already.
    So does this mean we can all now agree that it is not (and never was) mining and the lack of a sovereign wealth fund that is controlling the dollar?
    Yes..provided you and other Mining/China fanboys finally admit that China isn’t going to boom for the next 2 years (forget 20 years).

    • Come to the Pilbara and suggest China won’t last forever. The venom that one faces after such a statement is stunning. The mining community is scared.
      Those that search for news and information and who don’t rely on MSM platitudes realise what is coming. They’re in denial at the moment.

        • Yes, but the boom-bust cycle was a given. People are using the China story for the ‘its different this time’ fable. I’m watching Gladstone with particular interest. I remember the bust they had there in the 80s. Seems a lot don’t.
          But you’re right, the world will always want dirt. It’s just the amount that is in question.

      • But this boom is supposed to be the endless one.
        Cue a mining investment pipeline that seems to stretch just as far (atleast on paper/spreadsheets).

        • I was at the Burrup (Woodside LNG plant near Karratha) when North Rankin A came online in the mid 80s.

          About the only Chinese ever discussed in those times involved chopsticks and beer.

  8. DFM to answer the question, it’s going lower. Looking at the COMEX futures, and China slowing we could be back at 65c before long.

  9. Deus Forex Machina

    Sorry all been out…

    Answers to a few comments above:

    Houses and Holes is right on both the comments he has made above. I agree entirely on the AC thing though as you know I don’t like to play the man, given how hard this game is, but AC really needs to take a long walk down a hall of mirrors.

    V’raptor – agree with you and Mish. The notion of safe haven was never right as we have all deiscussed for months now.

    Dr Nick – my framework has been the same for almost 15 years now when I analyse the AUD. Fashion comes and goes but the key drivers are the key drivers. If the whole world implodes and we magically sale through things might be different but heaven help us if that happens – the AUD is going to the moon.

    Adrian – can’t rule out anything if we get a global meltdown. Believe it or not that hasn’t happened yet. Key levels on the way down besides the ones identified above are 0.9577, 0.9222 and 0.8073. The 0.8765 – 0.9222 region (give or take a cent) is the key levels the AUD needs to consolidate in if it is not going to crash to 0.8000/70 and lower.

    HnH…where are the threads on comments gone??? or is it just my firefox browser

  10. Dr Nick, my personal view is that the perception of a mining boom and links to China is enough to make interest rates higher and the AUD a more attractive place to be. However, as I have said before, this one dimensional quarry economy is a risky place to be – higher highs, lower lows.

    But the current mining industry expansion is a reasonable investment for future prosperity (with reasonable environmental oversight. We don’t want to throttle it too much.

    Hence, my preferred intervention in a Tobin tax to act as a dampener on currency moves, and allow us to implement other tax reform (cut other nonsense taxes).

  11. Deus Forex Machina

    Avid…I accept your count to a point…what about if AUD holds above 0.9222 (just thinking not telling) that suggests that this is a 4 and a move back above 1.10 if it ever comes would be the 5???

    I dunno elliot as well as you and the downside fits better with my fundamentals global markets and economic view but just wondering what you reckon…

  12. Rumplestatskin agree with you about a Tobin tax or any other measure to dampen the currency volatility. As someone said the other day (was it you?), the volatility seems like more of a problem than the actual level, i.e. how can businesses plan with such wild swings in the currency. Its a FRIGGIN casino.

    • How are you going to implement a tax on traders in The City (London) and Wall St (to name but a few).

      Taxing FX traders in Australia will make zero impact, our numbers are FA.

      IF they were daft enough to do that, I’ll move my account to Europe, USA, Dubai or Singapore under a company name. Register as a shelf company in the BVI and I’m out of the pool and I’ll pay NO TAX, income, provisional, cap gains or company…for pissing me off.

      • Deus Forex Machina

        if it ever came in it would have to be a global initiative but as you imply someone would not charge it…imagine the free kick that would be in terms of setting up an international trading hub to the country that thumbed its nose at the rest of the world…

        and then others would follow suit and the whole thing would break down…

        i’m increasingly thinking though we need to find a way to hand the markets back to “humans” if you know what I mean…

        you pseudonym speaks volumes for the difficulty in deciding where the delineation should/would/could be between deciding whats a “good” trader and what’s a “bad” trader…

        i guess it has to be some sort of time period held – but that wont necessarily work either. Back in the 90’s when i was at State Super i used to regularly hold trades for less than 10 minutes, so was I a “bad” trader??

        I do think though that if the pollies and central bankers cant get their arms around this we’ll end up with more regulation in a couple of years – hell they may gives bretton woods 2

        so make as much money as you can in the next year or two 🙂

        Cheers V

        btw – thanks for your kind words earlier

      • It wouldn’t be easy, but there are many arguments to show it is possible to enforce globally, and it is possible to catch derivative trades.

        There are also many suggested reforms a single currency issuer could make to both collect a tax from trade in their own currency and make short-term speculation more difficult.

        Although I tend to agree with this conclusion –

        “Of course, this outline simply shows how it is technically possible to enforce a Tobin tax. It is entirely possible that the political power of the financial industry is so great, that no serious enforcement mechanism of this sort could ever be put in place, even if a Tobin tax were enacted in Europe or the United States.”

        My point being that we need to be a little creative if we want to make fundmental changes.

  13. Yep DFM, that’s possible.
    Wave counts are potentials, not forecasts…. like any other technical analysis.
    That wave count is the most likely potential in my view, due to the 0.618 retracement, and the very neat A-B-C corrective trend channel. But anything is possible, of course.
    As for what will happen in the near term, no idea.

  14. Deus Forex Machina

    guys a tobin tax isnt going to help business…it will just lower daily volumes…moves like we have seen over the past few days will still occurr because the tax will act just like bro…you pays to play.

    what business needs is good advice from their bankers on where the currency is really going and where the real risks to their business from currency movements is and what the hedging options are

    unless you want to re-regulate currencies properly by fixing i can’t see that the tobin tax is going to help business at all…

    i’d also argue economically for our little island that a free float works best and the best thing about the aud getting smashed – and hopefully heading a little lower – is the safe haven bs artists get their backsides handed to them so the overall upward pressure on the aud from this lunatic cobal is withdrawn

    having said all that i reckon business really just needs to be better served by the currency strategists and economists…but they aare largely focussed on investors, traders and hedgies

    so maybe your right – a tobin tax drops daily punting and realigns incentives at the banks so that they give better advice

    i think i just converted myself, kind of…I need to go an lie down I think 🙂

    • You are basically saying every small business that export product/services, will need a currency strategist to hedge for them?
      Last thing we need is investment banker types preying on small business exporters with expensive hedging derievatives.
      Maybe we should retrain all the useless financial planners, currently mooching off Super funds, into currency strategists.

      • Deus Forex Machina

        No I’m not saying that…but when I did the currency strategy thing full time i used to talk to tiny little guys – in the scheme of the FX landscape anyway – hedging is just insurance like the building. you cant control everything in life and if the government has set us with a free floating currency then we need deal with it in a practical manner not wish it away

        but you make a good point about the cost of hedging…which i accept needs to change

        the key point is that the AUD coverage – whether media or from the banks should better try to inform business of where the currency is actually going and not spend so much time on the coincident stuff like “aud crash” or “aud to the moon”

        I’m actually quite passionate about this I think business is failed by the industry and a structure that gives chief economists the call rather than the guys who actually know where it is headed or at least the risks around same and an industry which is focussed on the big guys with plenty of turnover

        sorry to get on the soap box mav

          • Deus Forex Machina

            If the need is there Rumple I reckon we can add serious value and now that your on the team we can do some serious modelling of AUD and AUD crosses 🙂

    • DFM to me what you are describing is banks giving businesses good advice about who will win the last race at Flemington. We’re talking casino betting here.

      In an ideal world I would like to see all derivatives punters be required to have an interest in the underlying and all forex punters have an analogous interest via import/export trade etc.

      I know it is pie in the sky but these markets seem to be totally divorced from the (original) reason for their existence.

      • > these markets seem to be totally divorced from the (original) reason for their existence.

        Oh come on, nothing has changed.

        The markets have always existed first and foremost to raise commisions for dealers and brokers.

        Also they have always been volatile. Booms and busts, bubbles and crashes, have been happening forever.

        The machanisms by which trading on markets is done changes over time, but the behaviour of markets never changes, because the behaviour patterns of the human herd don’t change.

        • AC, what I mean is that rather than speculators adding liquidity to the market, i.e. trades dominated by people with an underlying interest, speculators now ARE the market, i.e. physical interest in the underlying is a small proportion of trades.

      • Deus Forex Machina

        Dr Nick…I dont accept your premise that this is like the races.

        But having said that I know plenty of people who use a systematic process to study the horses and make plenty of money following it

        Also derivatives are not evil…but their use can be toxic in the wrong hands…

        And I agree with Avid…except for the HFT guys…markets are markets as humans are humans and this acute period of volatility will wash away and we’ll end up back with something more stable

      • You’re both right – Dr Nick and Avid.

        Commodity and futures market’s in particular have become completely financialised.

        You need both speculators and hedgers to have a successful market – its just that the speculators (guilty as charged) have taken over, which I believe is because of global pension funds capital, due to the Baby Boomers.

        That is what is different in the hundreds of years of history of futures/commodity markets (also note that FX markets are less than 40 years old) = there is a huge swage of baby boomers savings wrapped up, bundled, financialised and moving across screens as meta-money like never before.

        Its not the computers, or the behaviour, its the demographics.

        • CDS was the textbook example of the dominant lack of a position in the underlying (or insurable interest — use whatever terminology works for you).

          The problem as I see it, when the speculators take over, is increased volatility — since the market is dominated by speculator sentiment, and sentiment about speculator sentiment, rather than insider sentiment (where I define insider as being someone with an interest in the underlying).

          I don’t see this as a technology /computer issue per se, although the existence of this facilitates it.

          • Deus Forex Machina

            CDS I agree with…if you want to short a stock you have to borrow the stock to sell it but there is a natural limit therefore to how much you can sell…with CDS there is no such limit.

            I think that when it comes to markets unless you are a producer of a hedger then everyone esle is trying to make money. So markets are always and everywhere dominated by speculators.

            the issue comes from the shortening of investment time horizons toward shortermism which of itself is not inherently evil either…look at the market makers on the NYSE or the SFE, when it started, they perform/ed a very important role for liquidity.

            so its not speculators per se it is the timeframe of trades, at least IMHO…and i genuinely mean the H in the IMHO – we’re all still students of markets

            I think that a combination of economic uncertainty and HFT has pushed the players with a medium or longer term timeframe out and so we end up with the super short guys running things…

            who’s law is it says good money is chased out by bad…thats what we have got i reckon

        • Speculators taking over is something that also has happened time and again through the centuries. Usually at the top of the big cycles, like the past ten years.
          I personally enjoy how easy it is to speculate right now, but I will be surprised if it is so easy five years from now.
          A lot of brokers and dealers will disappear, as the punters run out of cash & credit to punt with, and their commisions dry up.
          Also the inevitable increased government regulation (after the horse has bolted, of course) will make it more difficult to trade through the brokers that do manage to stay in business.

      • In an ideal world I would like to see all derivatives punters be required to have an interest in the underlying and all forex punters have an analogous interest via import/export trade etc.
        +1 . This is what scares me about having a market on carbon pricing. A fat fingered “rogue” bank can potentially make an electricity power generator go broke.

    • I think we should just make all market based trading a bit boring – by slowing them down to a pace at which the economic activity out in the real world actually occur.
      What if, the ticker tape slowed down to, say, two ticks every day? It is not “fixing” the price, just slowing it down 🙂
      It would junk all the HFT algos, hardware and the hi-speed bandwidth. But hey, you can use it to play some online FPS during the breaks.

      • It is for me, I only use end of day data. I almost never use intra-day, although I have watched the ASX200 religiously (sic) each hour for about 5 years in a row now, which only helps me get the “vibe” of the market.

        Its old fashioned, but I also use weekly charts for trading (mainly commodities and indicies) as well.

        Seems to work. 😀

      • FYI – There is a new USD 380M fibre cable from London, to NY being laid right now to save a few more nano seconds per trade so HFT rather than declining is taking hold. And no regulators seem to think this is a problem. It’s a joke… and it’s a trap for individual investors.

        • Deus Forex Machina

          lobbying is a 1st amendment right reaffirmed by the US Supreme court a year or so ago – we don’t have a chance on this one unless it looks like its going to cost pollies their jobs

        • There is a new USD 380M fibre cable from London, to NY being laid right now to save a few more nano seconds per trade
          Didn’t the City Bankers threaten to take their ball and go home if Tobin tax is implemented? WTF are they going to do with fibre cable then? String a cord and extend it to Dubai/Shanghai/Singapore?

        • Thats good news actually. Just like the internet stock meltdown, we will have some hard physical infrastructure left out of the scquillions that will vanish overnight.

  15. As I’ve been saying, we have to see the AUD as a (small) counter-weight to the USD. The move yesterday is well outside the range of one standard deviation, so we should expect it settle down a bit now, maybe re-trace some. But as long as the USD is rallying, the AUD will trend down.

    Your question is how low can the AUD go? The answer really is it depends on how high the USD goes. Considering that both monetary and fiscal easing are off the table in the US, and that economic contraction is unavoidable in Europe and Asia, it is very likely the USD will climb a long way. If so, the AUD is knackered.

  16. The gyrations in the market make one more thing obvious – as if we needed to be reminded – and that is that Ric Battelino wouldn’t know if his arse was on fire.

    There is an air of sublime unreality about the RBA.

  17. Just when you think the stupidity in the MSM business commentary has reached the bottom, Fairfax has put out a “Live blog” on today’s market events.

  18. Given all the challenges re currency speculators and distortions/volatility that ensue for the real economy, why hasn’t a bank devised a form of neutral trading ‘currency’ that removes the risk? Be it basket of currencies, basket of commodities/currencies, gold-linked what-ever?

    Maybe because all businesses secretly hope they can win on the fx play?

    • Deus Forex Machina

      AJ many of the sellers now will be people who bought the AUD as a vehicle for an investment in Australia, bonds, shares, carry etcetera and who now view the chance of making capital losses greater than the chance of making capital gains…so they are exiting their positions and going home not speculating per se

      think of australia and the aud as a share…its fundamentals have slipped so its earning potential (combo of capital gain + interest or dividend) has been reduced. So in the same way as the fundamentals of a company deteriorate and some people sell so to some people have sold AUD and the AUD crosses.

      Also don’t forget the USD is a big part of this…the AUD’s strength was highly correlated with the weakness in the USD so as it turns around so must the AUD.

      So it’s not about evil short term speculators its about changing outlook for the asset…currencies are similar to companies in that respect

      i think that some of the issues that are present in equity and CDS markets are being transferred here to currency markets…currencies are the most liquid markets in the world…the reason i trade them first and foremost is because they are huge and no one can push them around…

      that means I can use my skill as an analyst and trader to actually outsmart, or try to :-), the other guys and girls without waking up one day and losing 10% because the stock missed its earnings by a penny (apple did this one day a long time ago)…in this sense currencies are not like equities

      as for the above debate about volatility and the real economy it goes back to what I said above…corporate Australia, or any other country, needs to be better served by the professionals who take the money to be the currency and economics experts. It is a tough game but its doable.

      And as to your last point…I do think that there is a bit of trader in everyone when it comes to currencies – they are a lot of fun after all.

  19. Thank DFM, i guess that brings us back to the point that Australian businesses in the ‘real’ economy trading internationally just have to get used to the idea of actively hedging to take control of the volatility.

    Probably not ideal (ref Mav’s comments above) but not the end of the world either.

  20. China produces more than double the Iron Ore of Australia so a 10% drop in Iron Ore Demand could see a 30%-40% in Imports volume and a large move in price. It is inelastic, as demand increases price increases at a rapid rate, ie the 90% in a day that iron ore has had. The flip side is when demand drops or supply increases the price crashes.

    China will be the main thing to start the Australian dollar decline, but as the Australian dollar is not used my mining companies in international trade then it has no support, no reason for the big companies or other countries to step in.

    If you really want to know how low it should be, is get a large number of items in Australia and USA and work out what a dollar buys you and see the real exchange rate. AUD 30-40 cents (if you take into account bananas 10 cents)