Ben Bernanke stole the punch bowl for commodities and commodity currencies last night, which had rallied on the back of the Chniese rate cut and freeing up of deposit and lending rate controls. But with his usual equanimity, the Fed Chairman simply didn’t want to play ball and add more stimulus and markets were not happy as you can see in the chart below of the Australian dollar, CRB Index and gold, which was especially angst ridden:
On the basis of the price action since the low of the Aussie recently, the rejection of last night’s move above 1.00 and the fact that it is back below 0.99oo as I write, suggests that all we have seen is an unwinding of the extreme pessimism that occurred during May.
And well it might. As you can see in the chart below, which is based on the positioning of Speculative Traders of Australian Dollar Futures contracts traded in the US and as reported by the CFTC:
Clearly this is an extreme bearish bias and when everyone is short and bearish then it is almost impossible for the price to continue to fall on such a crowded trade. So the sellers dried up, hope sprang eternal about Europe and politico/central banker influence, and Australian data was much much better than expected. All of which is a recipe for a strong bounce when the speculators are that short.
This is another example of one of the indicators we have in our Aussie dollar valuation toolkit/process and which feeds into our 5 drivers approach.
So where does that leave the Australian dollar now?
It is all a question of your time frame. Indeed it’s always about your time frame. This is actually the first question I ask people when they ask for my view on the Australian dollar, or any other currency.
Readers know that I think the Aussie will retest last years low at 0.9430, that it will head toward 0.9000 and that the risks are there of a move below that toward 0.8000. That’s the medium to longer term view.
In the very short term though the picture is a little more clouded:
Using Japanese candlesticks, last night’s price action looks to me like it is a shooting star (look for the green ellipse above) which is usually a reversal pattern but equally needs confirmation from the following candle, today/tonight’s trade. Equally there is a big old trend line from last year’s high that coincided with the 50% retracement of the recent down move around 1.0020/50. So the Australian dollar would have to clear this level to open the way to a further rally.
But the key signs for the Aussie might actually lie elsewhere. Gold is in a downtrend and has been since Q4 last year. Commodity prices (as measured by the CRB Index) have been in a down trend since mid last year and the US dollar has been in an uptrend since around the same time.
So for me the outlook for the Aussie remains constrained by these headwinds of weaker commodities and a stronger US dollar. Not to mention lower rates in Australia and fears about Greece. Market positioning is still probably too skewed to see a resumption of the down trend yet but I’d be fading any rallies all the way up to 1.02.
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.