As I write the Australian dollar is up 0.62% to 0.9819 after making a low last week around 0.9690. Indeed the Aussie has, ever so slightly, broken through the top of the hourly downtrend channel it has been in since the run toward 1.05 in late April. Now it’s only 6.30 on a Monday morning, inside the first two hours of trade of the week, but the chances that a short-term, or medium term (expressed in days and maybe weeks, not months) low in the Aussie dollar are now high.
But back to the question at hand – why is the Australian dollar higher this morning in early Sydney and Asian trade?
The simple answer is that there was news over the weekend that Greek electoral polling is showing pro-austerity parties are back in the lead as we head toward the election in 3 weeks time. Also, there were stories suggesting that Merkel might be persuaded by the whole euro area debt sharing compromise. Here is an article from Saturday onBloomberg.
Both of these political moves are important because they are both the source of the latest down leg in euro and Greek sentiment. We always hear that polling shows the vast majority of Greek people want Greece to stay in the euro but then the election on May 6th delivered a very different verdict and so this supposed axiom of Greek love for the euro was rightly questioned. But it is entirely possible that having expressed their anger at the ballot box at this month elections and seen it deliver nothing but chaos, the Greek people may revert to a more conservative approach of what we might call conventional politicians as preferable. The alternative is also true insofar as they might go all out and vote for the anti-austerity parties and repudiate the bailout, but as a behaviouralist I’m betting that is a lower probability than reverting to what you know.
Equally, why wouldn’t Merkel be persuaded on the merits of trying to solve this debacle once and for all? For all the teutonic bluster about the laziness of the Greeks and Christine LaGarde’s pathetic slap about Greek’s needing to pay taxes over the weekend, the reality is that Germany benefits more from the euro than probably any other nation. It gets a much weaker Deutschmarks than it otherwise would – I can imagine a world where the USD/DEM would be making all time lows right now (that is Deutschmarks strong). The prosperity the euro brought to its southern neighbours helped its economy and any unwinding and bankrupting of these southern neighbours will render them too broke to buy German goods even before their newly minted old currencies like the Drachma and the Peseta tumble 30-50% against the mighty Deutschmark. So yes, Angela Merkel should be persuaded of the merits of euro bonds.
Of course, it’s possible that neither of these sensible developments will hold. But they make enough sense to rally markets anyway in the short term.
Now for the Australian dollar. The hourly chart above shows he reasonable retracement levels after a 7 cent selloff like the one we just had. What I might term a usual retracement would take it back to last weeks high at 0.9938 at the very least and possibly to the first green line on that chart which is the 38.2% retracement level of 0.9989. That’s another 170 points of bounce but it would still be consistent, at least technically with lower levels still.
There is another reason why the Aussie dollar might get a lift higher from last week’s lows – it seems there is a rotation happening, something I noticed Friday night. The euro v Australian oollar (EURAUD) rate was breaking down through its uptrend that stretches back to February this year on Friday night as you can see in the chart below.
Tentative as it is, it could be signaling that some fresh buying, whether from exporters or investors, has been entering the market over the past few days. Time will tell.
Have a great day.
Greg 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, financial situation or needs.