The Aussie is doing as I’d expected at present and continuing to struggle, hitting what I think is a 2 month low overnight at 1.0427 against the USD. The wash off the oversold hourly move a couple of days ago pulled up exactly where it should have just below 1.0560/75 and last night saw it under pressure once again.
I’ll get to the chart in a second but I think it is important to comment on the Aussie falling at a time when equities are trying to break higher. Some readers have written to me asking why or how this is the case when it feels more like a risk on time than a risk off time – so the Aussie should be benefitting.
There in lies the fallacy of composition. As I always say the Aussie is the world’s favourite punt – that is we have a deep liquid currency that trades 5 and a half days a week with a central bank that doesn’t get involved too often, fairly stable political climate and a relationship to other things that punters like to trade such as commodities and things that punters thing they understand like global growth.
So we are in the top 3 or 4 traded currencies in the world these days.
But the Aussie is not one-dimensional – it has a myriad of inputs into its direction and these inputs vary in strength depending on the time frame of the trade or hedge being under taken. I always distill the drivers into 5 key factors:
- Global Growth and Commodities
- Domestic Growth and Interest Rates
- Global Risk Appetite/Aversion aka Investor Sentiment
- Technicals and
- The USD – the other side of the coin
I wrote about this method I use when I first started blogging at MacroBusiness early last year – you can find it here and subsequent blogs filled out the drivers and their relevance.
Anyway the point of this is to say that sure equities are up and trying to break out but sentiment seems still to be far from ebullient. Global growth is ok but not great and people are once again getting worried about China. The domestic economy seems to be weakening again if the recent data is any guide and the technical outlook, as you’ll see below, has turned a little sour.
Add to this the fact that if anywhere on the planet is looking more healthy than expected it is the United States which is pushing the USD higher as you can see in the chart below of the USD/JPY and then the EUR/USD (the Yen and Euro are quoted differently so USD strength in the first chart is price moving higher while in the second, against the Euro, it is price moving lower).
So all things considered the Aussie is struggling a bit based on the 5 drivers – for the moment anyway – and it is USD strength that has it on the back foot. I think that this “break” in what people have been used to over the past year with regard to the correlation between the Aussie and equities or so-called risk on or off could be under pressure for the following reason.
The US economy is in a kind of sweet spot, at least compared to everyone else and the expectations people have held for both the US and everyone else. It’s also an election year, which is often or usually good for stocks so maybe just maybe, the S&P and Dow can hold up a little better on hope and expectation and ok data. This should help buoy the USD and keep the Aussie Dollar, Euro and Yen (amongst others) under a little pressure for awhile longer.
The US Dollar is the other side of Aussie Dollar but crucially also Commodities are putting downward pressure on both, breaking the equity/Aussie Dollar nexus. At least that is the feeling I’m getting but time will tell.
To the current technical picture.
As you can see above my Bolly Band Strategy is still short and last nights low of 1.0427 wasn’t too far above the support zone of 1.0378 (which is the big black line and equates to previous range tops) and 1.0404 which is the 200 day moving average.
On my read of things if the Aussie slips through here then we are headed toward 1.00ish to find the real underlying support I talked about last week.
Now you know the really interesting thing – I’m not overly bearish which, given my complacency (trading wise) tells me that perhaps the Aussie has further to fall than I think.
Have a great day
Gregory McKenna
www.twitter.com/gregorymckenna
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 or financial situation