Australian dollar at the edge

See the latest Australian dollar analysis here:

Macro Morning

We never want to get too bearish just for the sake of it but the Australian Dollars break down through my target from earlier in the week of 1.0322  yesterday and then this morning’s take out of 1.0230 suggests to me we are on the verge of a cascade that may see us all the way back to 0.9388 at some point soon.

So far the markets are behaving in an amazingly subdued manner given all that has happened in Europe last night and the night before. In the high stakes game of poker we have seen early in our time zone today President Sarkozy and Chancellor Merkel up the ante on Greek Prime Minister Papendreou and they are now effectively saying you are either in or you are out. In withholding aid till Greece sorts itself out they are putting markets into a twilight zone of at least a month.

I always reckon markets abhor a vacuum and the likelihood is that something must fill this void and it is most likely to be fear and uncertainty.

That being the case, and noting that investor sentiment is one of our drivers, then without resolution it will be hard for the Australian Dollar to retain sustainable upside. Last night’s bounce and subsequent selloff was a case in point. Add to this the concerns we highlighted earlier about China and German economic growth and increasing chances of more RBA cuts and I see a somewhat bearish outlook.

So looking at the daily chart below you see that the 1.0230/40 region is really important support on the daily charts and the AUD/USD is sitting just around it as I write. It is both the 38.2% of recent up move as well as the 50% retracement of the big move down from 1.1075/80 to 0.9388. So it should be solid but if it breaks we could be in for a much deeper – perhaps total retracement of the recent rally.

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  1. +100
    Great stuff. I’m having some publishable chart issues Greg is there any chance on one of your future posts you can post AUDUSD overlaid onto ASX200(or AORDS) and SP500 to show correlation?

  2. I think the markets are not panicking as only 60% of Greeks have a negative view of the bailout but 70% want to stay in the EU. A major scare campaign orchestrated by the Greek and EU leaders will easily lead to a passing of this bailout deal. Judging by previous referendums, a failure would probably result in another referendum in order to hopefully get the right answer.

    The real danger in my mind is that 30 days is a long time for Italy to keep defying demands to cut spending. They had a fight over raising the retirement age by 2 years in 15 years. They will not easily agree to anything meaningful. It could well be that by the time the referendum arrives, all eyes will shift from the measly Greek debt to the unbailable Italy.

    Another danger is further signs of Europe going back to recession which is likely due to all the austerity. This could also turn eyes to the EU as a whole as even if Greece agrees to suffer before collapsing, the EU will simply not be able to afford their EFSF. In the meantime, further downgrades of Italy and even France wouldn’t be surprising locking Italy in the PIIGS pen.

    I’m looking forward to seeing Italy’s 10year bonds tonight. They are already in unsustainable territory.

  3. A major scare campaign orchestrated by the Greek and EU leaders will easily lead to a passing of this bailout deal

    Premature conclusion; they have the Icelandic example to follow, and that can be persuasive too.

  4. The Greeks have a choice:

    Stay in the Euro and accept perpetual poverty; or
    Leave the Euro and regain hope

    This is not a new situation. It is a replay of the kind of fiscal, credit and real-economy crisis that used to overwhelm countries in the good old days before the development of modern central banking.

    Really, having been gulled into contracting out their central banking functions to Frankfurt, what result should the Greeks expect other than one which is good for Frankfurt.

    They better get off the bus while they have the chance.

  5. DFM,

    I just dont get it. How is the Aussie staying so high. Interest Rates going down, Euro issues etc….. is because the Chinese and US are at a currency war. I would have thought with the interest rate cut it would have fallen below parity.


    • I hear you, but at the end of the day they took 25bps off the premium. 4.5% is still more than 425 over US cash, and we’re still AAA, low sovereign debt, etc etc.

      A few cracks starting to show in China though. Bring on 80c I say…