You might be asking the question: how can the Australian dollar be back above parity after a night where Spanish and Italian yields blew out and only a couple of days before the Greek election?
Anyone who tells you that this is because the Aussie dollar is a safe haven should faded quick smart. The euro was higher as well and Greek equities have been on a tear in the last couple of days.
What has happened is that markets got a bit excited after Reuters broke a story saying that the globes central banks are getting ready to provide liquidity to the global financial system on Monday morning Australian time in the wake of the Greek election, and that the BOE also is putting in place some extra measures for the UK economy as well. The data flow from the US has also suggested that we might even get an announcement of QE3 at next week’s FOMC meeting.
Now all of this is good but it’s really just akin to calling in another few apparatus to help contain a fire that risks getting out control even though they know they probably can’t put out that same fire.
Equally important in these market moves for the euro, Aussie dollar, Greek equities and other markets, is positioning. I know that I have been talking about positioning a lot lately when I havent really touched on it much before. The reason for this is that it is one of the tools in my tactical trading tool kit and because it’s tactical it doesn’t always come out. But with market positioning at extreme levels, at least in the short term, the speculative community has become a much more important signal than is the case when positioning is more benign.
But in positioning we see the risks.
My guess is that the CFTC data that will be released tonight are likely to show a reduction in the speculative Aussie and euro shorts after the rally of the past week. The question then becomes where to next?
For me the Aussie is sitting at a critical juncture. 1.0026 is the 50% retracement level of the move from 1.0469 to 0.9582 which was the recent low. The Aussie sits just below that at present with 1.0130 the next key resistance level. If it gets through here then it is probably running into the 1.02’s, maybe even higher.
But its a turkey shoot, isn’t it.
Who knows how the Greek election is going to go? We can, and do, hope that we get a positive outcome for Greece and the markets but the Greek people may still see these two things as incompatible. Indeed we could get another uncertain result which won’t help anyone.
For mine, the recent round of moves have been about position squaring into huge event risk and even though the central banks stand ready to provide liquidity and support markets the reality remains that any relief rally will run into headwinds fairly quickly.
Can you trade the action over the weekend? Of course you can if you are of that mind. Not for the faint hearted but at such a juncture you might just want to buy puts AND calls, buy AND sell puts or buy AND sell calls on your favourite markets and depending on your predilection toward what you think the outcome will be. I wouldn’t be trading spot at the moment or leaving positions open over the weekend unless you really have a big risk tolerance and are prepared for the gaps that we could get early next week.
It’s possible nothing happens and that would be a g reat outcome for markets, not for the traders with the options above though, but it seems unlikely that this is the result come 5am Monday when the forex markets open for business once again.