Macro Morning: Australian dollar cracks

morning121

It was all about FX overnight with the US dollar stronger knocking the yen through 100, the Aussie below its range low and hitting the euro back toward the bottom of the range. Dr Copper was under a little pressure and gold and Nymex crude were both lower also.

The absolute catalyst is hard to know but it was clear that this was a big move, probably a portfolio shift, that fed on itself because everything started to move at the same time as even the most casual perusal of the charts will show.

Could it have been the improvement in jobless claims which at 323,000 was another 4 year low? Possibly, but the timing seems a bit wrong. Whatever the catalyst the impact has been important for both the Aussie and the yen because it has kicked them out of their recent ranges.

Yesterday’s employment data continued the recent volatility in such a fashion as to lead the NAB to say in their summary to just ignore it. But FX traders certainly couldn’t ignore it with the AUD trading from 1.0165 up to 1.0253. But something strange then happened – for the first time in a very long while sell orders entered the market and sat on the Aussie. When I noticed this I tweeted that I was going to go short and did but took the position back way too early given the overnight low was 1.0044. My lifestyle short is still in place and we’ll let that one run and see where this emerging AUD trend toward weakness wants to go:

aud, audusd, australian dollar, australian dollar price quote, audusd weekly

As you can see in the chart above the Aussie has broken the range and we are now looking for a test of the trend line and 200 week moving average which comes in around 0.9850.

The worm has turned for the Aussie and whether it is us and our readers or George Soros and his disciples it is clear that sentiment has changed from the Panglossian outlook for Australia and the Aussie dollar that has been in place for a couple of years now. After a long period of range trading the path of least resistance seems to be down.

The other big move was USDJPY with a break of 100 has been coming for a while and while we always trade the range/box until it breaks it is the break up and through 100, which is decisive, would have dragged longs into the market.  Positioning is such in yen shorts that the past few weeks has given the yen bears fresh space to take USDJPY higher. It’s true I didn’t see this one coming, certainly not in the timing overnight, but a break is a break and traders will be buying now.

jpy, usdjpy, yen, dollar yen, dollar yen quote, daily chart

Based on the usual Fibonacci projection from the break of the range a target of 1.0250/1.0350 seems reasonable.

Turning to the euro and it was the US dollar’s strength that has driven it back down to the bottom of the 1.30/32 range with an overnight low of 1.3009 after a high of 1.3177. The range remains the play and as you can see in the chart below the trend line remains intact for the moment. But a break of both the range, the trend line, which comes in at 1.2992, and the 200 day moving average at 1.2982 would be decisive.

eur, eurusd, euro, euro (eur) price quote

It is an interesting outlook and really does hinge on the outlook for the USD and particularly USDJPY. So we will take a lead from those moves. In the UK the decision by the BoE to keep policy unchanged had little impact on the market but GBP reversed lower with the US dollar’s move. I was wrong for a day but it feels like GBPUSD is heading lower.

On stock markets things were looking good with Jobless claims printing another 4 year low of 323,000 until just after lunch which is when USDJPY broke higher and the Aussie and Euro got hammered. Equally financial shares came under pressure around this time and Apple also came under pressure.

It wasn’t a huge sell off by any stretch of the imagination with the S&P only down 0.37% of 6 points. The Dow was 0.15% lower and the Nasdaq fell 0.13%. In Europe the FTSE and DAX were marginally higher up 0.14% and 0.16% respectively but in France, Italy and Spain stocks were down 0.69%, 0.95% and 0.28% respectively.

Looking at commodities we see the US dollar’s move had resonance here as well with Nymex crude off 0.68% to $95.96 Bbl. Gold and silver were also a bit lower trading at $1455 and $23.60 respectively. Dr Copper was off 1.16% but corn and wheat were both up sharply with near 3% moves but soybeans lagged only rising 0.8%.

Data

The RBA’s quarterly Statement on Monetary Policy is released this morning and will be interesting reading to see what was behind the move to lower rates this week and what might be in prospect. This might introduce a bit of volatility that would otherwise be absent on what should be a fairly quiet day before German trade data tonight.

Twitter: Greg McKenna

Comments

    • Lets not get distracted..

      Why did the AUD crash? I don’t think it was Plosser’s remarks, as the popular explanation goes. Good news if it is as per DFM hypothesis of portfolio shifts.

    • The AUD is still far from reasonable level and this currency has a talent for being very frustrating, I would not bet too much on it falling for more than one week( the market memory seems to be Monday to Friday, quarter is so 2k).I have a lot to gain for it being low.
      houses prices one, that s a good laugh of course.

  1. Whilst I would like to see the dollar fall, I wouldn’t count a movement of 0.0005 as a capitulation.

    • You need to understand this is both a daily and weekly break of key support Peter.

      This week alone has seen a 2cent drop, with 20 day average true range at its highest level in nearly a year.

      This is a significant move, to say anything otherwise is foolish or naive at best.

      Disclosure: forgot to add, yes Im short with a small amount of risk and will probably build short positions from here

      • Was and forgot to add yesterday as well. When Soros decides to cover it would be next best opportunity to long. Unclear what “has to come hard” from Druckenmiller means but probably they will shoot for below parity at it would generate loud bearish news to cover into.

      • I think that you have misread me Chris, I am quite disappointed that the $AUD hasn’t fallen below parity with the $USD already, so I’m not prepared to get excited over a small fall of 0.0005 – Yes I see the trends, and shorting the $AUD looks like a no-brainer to me, except that we have all seen short term movements before.

      • Prince what do you think the level it will reach will be? DFM talked about 93 in 18 months is that looking conservative?

        The reason I ask is that most of my assets are not in AUD so we have been making sure that I haven’t drawn down on them too much in the past couple of years and have been living purely off AUD earnings.

        PS I’m sick of CJ et al making fun of you blokes. Everyone is entitled to their own opinion, even those with vested interests. If he doesn’t agree it doesn’t matter, he just has to respect others right to analyse the situation and interpret in their own way.

        Some are right, some are wrong, however going off like a spoilt little child, ridiculing others and gloating at what appears to be the wrong time really does him a disservice. It really highlights a certain insecurity with his own judgement.

        Many thanks for your analysis gents.

      • Dont know what level its heading to – my best guess in the short term is 96-97 cents.

        Beyond that, its hard to gauge, because a big unwind could see a lot of upside and downside volatility.

        On CJ – I dont care about his views or opinions, hes just another economist in a long list of economists you probably shouldnt be listening to, if only to get a contrarian opinion to help protect your portfolio.

  2. Oh seriously – a statement of fact is controversial ?????????????????????????????????????????????????????????????????

  3. If Soros still has his short on the AUD, he’s now starting to make some serious money.

    • thomickersMEMBER

      when he made $2 billion in 1992 for shorting the UK pound, he held the position for a good 3-4 months.

      when he made $1 billion on the yen just recently, he also held the position for a good 3-4 months

    • “…..The worm has turned for the Aussie and whether it is us and our readers or George Soros and his disciples it is clear that sentiment has changed from the Panglossian outlook for Australia and the Aussie dollar that has been in place for a couple of years now……”

      I have a kind of horrified respect for Soros. I think I understand ALMOST as much as he does about property cycles and the economic cycle and exchange rates etc; but there is NO WAY I can pick the TIMING like he does. I would have been “shorting” and losing all the way long before now.

      “The market can stay irrational longer than you can stay solvent”. For all the big winners in Michael Lewis’s book “The Big Short”, there were others who had had to “fold” and hence missed out on profiting from their insight (well ahead of most people) that the market was indeed irrational.

      I use my knowledge to lobby for reform to end the great rent seeking, wealth transferring racket. But if I was as fiendishly clever as Soros I would probably be doing what he does – on a tiny scale. I don’t know how he does it – he seems to be able to pick when a market is finally ready to stop being irrational any more.

      • Soros famously is a major financial supporter of “conservation” activist groups. So are the Rockefellers.

        Get the connection? If you don’t, never mind.

        I bet Soros cashes up his property portfolios at just the right time too.

      • People tend to remember great wins, while Soros did the same trick (betting on currency collapse) during asian crisis 1997, and lost materially

      • For the timing, its not what you know, but who you know and what they tell you. I’d say Soros does well for that reason.

      • Why is that anyone does well – it’s automatically assumed they cheated. Soros just does the maths and takes the risks. It’s hardly rocket science that the Aussie is a bubble currency that has political pressure looming at it for something to be done to bring it down. It was either this month or next that the dam was going to burst.

      • Well if the “hedgies” make money on shorting the $AUD it will be the first time in a long time for most of them, collectively they are underperformers.

    • GunnamattaMEMBER

      Shows that range it has been in for about a year really clearly.

      My guess would be (not that I trade) that it bounces today, but if it sustains that move lower then we are at long last in a different ball game.

  4. Interesting, if aud falls below parity, would it raise expectations of RBA rates up to fight inflation? or they would bet that RBA will tolerate higher inflation to keep employmnet and other things going

    • Free_Market_Delusion

      That’s a very good question that I often ponder. I’d imagine some lag in terms of any inflation impact,however! If conditions deteriorate then inflation maybe offset by lower prices. The only inflation that will complicate this is fuel costs.

      Several dynamics going on at once. How the economy adjusts will be interesting to say the least.

    • There’s inflation and then there’s inflation.

      In this case we face higher prices from a falling dollar as a manifestation of a fall in living standards. Something most economists say Australians have to accept. As such inflation will have to stay above 3% for quite sometime for the RBA to act – beyond a tick or two up – if we get down to 2%-2.25%. At 2.75% or 2.5% they might just hold for up to a year.

      House prices are what they will watch. If they breakout out of stasis and rise more than a few percent maybe the RBA will raise rates a tick or two to send a signal that cheap money won’t last forever. But the RBA among many thinsg wants the boomers to start selling and downsizing and freeing up their capital to in part flow down the generations and start getting more ownership among GenY etc. Keep in mind that in many European cities the parents buy their an apartment kids when they get married – so this is not a unique social economic outcome.

      Until the US brings QE3 to a halt – rates will stay low in Australia and work to take the heat out of the dollar. Eventually the impact of the lower dollar will flow through to high company profits and higher tax receipts. Which might eventually flow through to wages if inflation is decidedly higher. But if everything stays pretty much flat and just ticks over with a slow return to a better budget position then the status quo could be with us for 18 months or longer. A lower dollar should also keep employment steady or at least avoid a serious collapse.

      The RBA and Treasury finally appear to understand that there is another economy outside the mining sector and the gravy train is over. Until we pass the peak of the mining investment boom and start to see what it looks like on the other side – the RBA is going to remain very nervous. These guys want to keep their jobs after Sept 14. They all saw what happened in Japan. The idea that the RBA is independent is a complete illusion created by politicians to give them cover for taking the hard decisions. But when it ain’t working at a macro level – the government has to step in and reboot the process.

      In the meantime, everyone should take a long cold shower about real estate – it’s going to stay subdued for a long time. No matter how cheap you make money to borrow – prices are still very high in relation to wages and as much as people like to call other people stupid – most people are quite aware that over borrowing at >5% is just asking for trouble down the track. Human beings might do plenty of dumb things but we didn’t build a global civilization because we are entirely stupid. On balance “the crowd” aka “the mob” is a lot smarter than often given credit for.

      As to the stock market – does the RBA really care if you lose your money gambling against professional managed funds and high speed traders. The honest commentators like Marcus Padley warn people about the stock market everyday. And unlike housing there’s an almost limitless supply of bridges to sell stock in.

      • “But the RBA among many thinsg wants the boomers to start selling and downsizing and freeing up their capital to in part flow down the generations and start getting more ownership among GenY etc'”

        I haven’t seen this policy clearly articulated, can you tell me where it is and how I read about it?

      • I like your logic (and your optimism) on RE – but this is not what we are seeing in the data – speculators have piled back in and are gaining steam as as the rates fall.

        At a practical level i’m seeing lots of grey hair and speculators at sales and auctions – a significant change from 6 months ago.

  5. if current inflation running 2% and non-tradables 4%, does it mean if tradables inflation increases to 4% non-tradables shoot 8%? or they are not in lock step

      • haha, yes seems every government tires to fiddle with CPI, just promise lower rates, when elected fiddle with CPI to get them. Soon it will be US style hedonic CPI Index nobody belives anymore.

    • Alex Heyworth

      First, you need to understand what tradables and non-tradables are. A brief definition of non-tradables would be goods and services produced and consumed domestically that are not close substitutes to import or export goods and services.

      Inflation is driven essentially by two factors: costs and profit margins. For non-tradables, costs include inputs, wages and taxes. For imported tradables, the factors are the same but the cost is also subject to exchange rate variation. If the $A goes down against the currency which is used to buy the tradable, the tradable will cost more in $A.

      The determination of our trading partners to keep their currencies low has kept imported tradables inflation low recently. Non-tradables have been subject to slightly greater cost pressures (probably wages + carbon tax + increased energy costs for other reasons) which means their inflation has been higher. Tradables that are produced here (ie that compete with imports) cannot pass these costs on as readily, because of the import competition. Thus their inflation tends to be the same as imports.

      This is probably about to change dramatically. If the $A goes down sharply, as suggested by eg Mr Druckenmiller, tradables inflation will spike sharply as well.

      Bottom line: the factors affecting the two are the same in nature(except for the exchange rate), but different in timing, size and effect.

  6. “But the RBA among many thinsg wants the boomers to start selling and downsizing and freeing up their capital to in part flow down the generations and start getting more ownership among GenY etc’”

    I haven’t seen this policy clearly articulated, can you tell me where it is and how I read about it?

    >> Just a whole of government view that housing needs to be turned over and downsizing is critical to that. They are never going to articulate it as such – but if you look at the general view that the empty nesters should downsize and free up their assets – and the increase in parents gifting money for deposits etc it stands to reason that you can only have that happening if prices are stable and the boomers are able to sell.

    The logjam in the housing market the past couple of years was very much among the older generations who were holding off selling.

    With prices up a tick and a general feeling that this is “a good time to sell” you have seen movement across the quality housing markets. How long it lasts is another question. And there were plenty of signs that after a good post Xmas sales period the market was running out of steam. Which is one of the reasons they have cut rates again. I realise that a lot of this is just can kicking – but the alternative is not that pretty.

  7. If we start from the premise that motion in the currency market is cyclical then we should ask ourselves how the economy will look when the resources-investment surge abates – when this returns to around 1% of GDP again – and when the associated capital inflows have receded from the system. This will give us an idea of the extent of the correction in the exchange rate that we should expect to take place.

    Post-boom, it is assumed that the export sector that makes a permanently larger contribution to GDP. However, the permanent net income deficit will also have increased, so that not all the benefits of expanded production will accrue inside the Australian economy.

    Because we don’t know what the prices for iron, coal and gas will be, we can’t say exactly how much extra income will accrue to the Australian economy over time, but we can say the impact from year to year will be far less than the massive one-off surge in demand associated with the investment phase of the last few years.

    In any case, 85% of the profit share of resource exports will accrue outside this economy so that while the value of the exports will accrue in the trade data, the associated profit accounting will show up in current account outflows. This means that aside from the volume effects of increased resource exports, most of the price effects of resource sales will not reflect in GDP. Since resource extraction is typically not labour intensive, the ongoing contribution of resource production to GDP will be far less than is commonly assumed.

    If we look more widely than the resource sector, we have an economy that is permanently out of balance at current prices. Real wages are very high – as high as they have been any time since the 1880’s. The non-resources high-value-adding export-sectors and import-displacing sectors have been shrinking, and now suffer from lack of scale, lack of investment, lack of market and lack of momentum. This is an absolutely huge problem for the economy, and means these industries will have to be rebuilt – in some cases practically from the ground up.

    Moreover, the import-facing, consumption-dependent and service-oriented sectors are constrained by high household debts and, in many areas, market saturation.

    This is reflected in the public accounts, which very clearly illustrate it is no longer possible to grow a balanced economy at full employment even with still-strong contributions from export-led investment.

    The implications of all this – of a return to low momentum in the resources sector, a stunted non-resources export sector, growth barriers in the domestic sectors and structurally high costs – is that the economy in 2014-15-16 will look increasingly like the economy of the 1980’s.

    We will still face the same impediments to balanced growth:

    – a profoundly idiotic so-called “investment” framework that favours tax shelters over investments that could increase the productive capacity of the economy
    – an over-valued exchange rate
    – persistent under-investment in infrastructure
    – a dysfunctional tax/fiscal system

    To me, this all suggests the AUD will fall towards its historic norms – to levels in USD0.60-0.70 range.

    The MB thesis is that the property bubble may be given a new lease on life. My thesis is that a collapse in property (and credit generally) will follow from a savage decline in real wages resulting from depreciation. This is by far the more likely path for this economy.

    Of course, to become really bearish, it is possible the resulting contraction in employment, output and the fiscal position, and the unavoidable persistence of import-related high inflation, could propel the AUD back towards its all-time lows.

    • BubbleyMEMBER

      The lower dollar will also make Australian property a lot more attractive to foreign investors.

      This could keep the bubble going. There is a lot money floating around the world looking for a safe haven, Aussie property might be it.

      • Sounds perfect for those who want to dump their properties and retreat to cash for a while. Let some other sucker hold real estate in a country with 25000 kms of waterfront.

      • C.M.BurnsMEMBER

        Whilst the emerging stereotype of a foriegn investor in Australian property doesn’t care about yield or capital growth, and this may well be true, I’m pretty sure they are not looking for capital losses.

        In briefly’s scenario the economy is cactus and house prices will (likely) either crash and stay there, or increase their slow melt. and stay there.

        Why would a foreign investor buy into that market vs somewhere like the US which has already hit bottom and slowly increasing ?

    • Great post Breifly,

      I would only add one thing:

      The miracle of the Australia economy was really that it managed to hang on so tightly to China’s coat-tails. China’s options post GFC were a lot easier to predict then China’s options post Infrastructure build and post export led growth. Make no mistake about this Australia is the tail to China’s dog, so if we want to understand where the dog is headed we need to pay a little more attention to whats happening at the other end of the animal. Given our position at the tail we don’t have the greatest view, but at least we are firmly attached.

  8. GunnamattaMEMBER

    Lovely post

    Particularly this

    ‘Real wages are very high – as high as they have been any time since the 1880′s. The non-resources high-value-adding export-sectors and import-displacing sectors have been shrinking, and now suffer from lack of scale, lack of investment, lack of market and lack of momentum. This is an absolutely huge problem for the economy, and means these industries will have to be rebuilt – in some cases practically from the ground up.’

    You are right it is 80s all over again – I have said it before and so have a few others. Basically we have coughed up a generational preparedness to take on debt, and a mining boom to transport ourselves back in time. All we need is someone of the Keating Hawke mode to start banging on about structural reform, doing some hard hards, maybe a reprise of a ‘banana’ republic’ style comment.

    • 30 years pissed down the toilet.

      Last year Gittins and co were banging on about how the mining boom and the high dollar were forcing labour to be better allocated. Around that time I had to further reduce the hours of one of my multimedia editors to just 2 part time days – and so he went off and got a job washing dishes on the weekends to make up for the lost income.

      Just how short sighted does the intellectual elite of this country have to get before we call time out.

      I doubt I’ll ever expand my local work force again. Better to invest in software automation and eventually start hiring in Manila.

      Hopefully a new generation of wannabes will come along and will take the risks I once did. But at my age self preservation of my assets and lifestyle comes absolutely first in all decisions I make.

  9. Massive technical damage done to the AUD. The long sideways move is clearly over , to the downside.

    101.80 ish would be a perfect short area- can’t believe it wont get retested after serving as such long held support. Nothing between there and .96/7 ish. Big day yesterday for AUD. We may not see the 105 handle again for a decade.Longer perhaps.