Macro Morning: Australian dollar wilt

See the latest Australian dollar analysis here:

Lunatic RBA discovers quantitiave easing drops Australian dollar


So rhetoric works sometimes it seems and my hosing recovered somewhat overnight with the big fall in the Aussie and Dr Copper going the way of my position. It was actually bad trading and the type of trading that only a big balance sheet, small positions or a big fund can really justify. But I deviated from my usual trading style because I needed to show someone that you could make money trading this way but it is not ideal.

Anyway the fall in the Aussie overnight and the huge almost 4% fall in the price of copper along with the big build in crude oil stocks in the US together with weak data and the Fed’s comment that it could increase or decrease the size and scale of its bond buying really does signal that the little global economic sweet spot of a few months back has evaporated.

Indeed I spend a lot of time looking at the Citibank economic surprise indices for various nations and as I noted recently data has been printing much weaker across the globe since about mid-March. Last night was no exception with the canary in the coal mine, as the team at Business Insider put it, was the release of the Korean export data which while positive was much weaker than expected printing just 0.4% YoY against the punditry’s 2% expectation. Clearly Korea has close ties with Japan and China and clearly Korea is a good lead on overall global trade so this data is a concern.

Add in a bit of weakness in the ADP employment survey which undershot with a 119,000 print against the 150,000 expected and the ISM manufacturing PMI which fell to 50.7 from 51.3 last month. It has been and remains our hypothesis that the Fed and others free money is goosing stocks higher but in the end the economy is where it is at. Assets like the Australian dollar which are still tied to the global growth outlook and perceptions of the miracle that is the Australian economy are vulnerable from this economic weakness.

Indeed stocks should be vulnerable too and at some point they will likely reacquaint themselves with reality. Last night saw a little bit of reality creep into traders minds with the Dow off 0.94%, the Nasdaq down 0.89% while the S&P was 15 points or 0.91% lower at the still heady heights of 1583. In Europe the FTSE was higher on the back of bank moves up 0.32% while the continent was largely closed for May Day.

But it is the Aussie which has been my focus this week and the crash in the AUDCAD rate which we flagged yesterday and which occurred yesterday evening Sydney time as you can see in the chart below really does signal that the worm is turning for the Aussie dollar.  The AUDUSD looks biased back toward the low of the past few weeks at 1.0219 and should it close the week below this level then it would certainly suggest that the big weekly uptrend we highlighted back on Monday and turn the outlook significantly lower.

audcad, aussie cad, australian dollar canadian dolla price quote,  daily

My target is 1.0233 for this cross.

On the AUDUSD specifically I was sent a chart of the Citi Chinese Eco surprise index versus the Aussie dollar earlier in the week – something that I hadn’t thought to connect myself but it tells a story and the story fits with my view that the Aussie is under pressure and at risk of the legs of its positivity being kicked over. So as I note above, the AUDUSD needs to hold above the recent low and the trend line from May 2010 or the outlook turns technically.

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

Turning to the euro, it managed to hit 1.3242 at one stage overnight but has since sunk back to 1.3182. The candle is a warning to the bulls that momentum might have stalled and this certainly makes sense given the ECB meeting and announcement tonight where the market widely expects rates to be cut. In the face of this expected cut the euro’s strength has been baffling but then again the data from the US hasn’t been so flash the past little while which is clearly what they FX markets have been focused on:

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

USDJPY looks to us to be biased lower still although it is steadfastly flirting with but rejecting the break of 97 which is necessary to accelerate things to the downside.

On commodity markets as discussed the fall in copper was huge and it continues to signal a rethinking on the outlook for global growth. Gold has backed off the resistance zone of 1475 I highlighted a week or two ago falling 1.76% or about $25 to $1451. Silver was off 3.47% to $23.53 and Nymex crude was down 2.72% on the back of the huge build in stocks which rose 6.696 million Bbls against the expectation of just a 0.8 million build. In Ags, corn was 0.15% lower with bigger falls in wheat and soybeans which dropped 1.56% and 2.06% respectively.


In Australia building permits, export and import prices and then tonight the ECB interest rate decision and initial jobless claims.

Twitter: Greg McKenna

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  1. Of recent I’ve been focused on structuring financial products which will profit from a rapidly devaluing $AUD.

    It seems highly likely to me that genuine tangible product shortages will occur if the Australian economy transitions to recession and the $AUD also devalues quickly.

    It seems to me that in times of uncertain demand (recession) and a devaluing $AUD, it would make sense to importers to simply wait out the transition period, rather than hedge the devaluation risk and also need to discount their product within a recessionary economy. Interestingly this is exactly the opposite to what a factory based in Australia would do at the onset of a recession. Normally a factory owner is motivated to maintain very high levels of factory utilization, because high volume is necessary to cover the fixed (sunk) costs. Consequently at the onset of a recession a factory owner discounts product to maintain high utilization (and clear out inventory). These actions are deflationary.

    Contrast this with the actions of an Australian importer. Even if he has signed minimum volume supply contracts (with his Chinese manufacturer), he is likely to want to dump excess product into the US or EU wholesale spot markets, rather than try to import product into Australia and pay handsomely to hedge his currency exposure.

    Maybe new importers will step into the void but I suspect they to will be inclined to wait on the side lines till things stabilize (why accept a very risky trade when you have absolutely no contractual supply obligations to honor)

    This all suggests to me that a recessionary transition in Australia will be accompanied by a shortage of real products and genuinely empty shelves. Sounds like a situation where volumes will collapse but prices will sky-rocket. I believe this is called stagflation!