More from Gabriel Andre on the currency market.
“The Aussie is hostage to competing forces right now. On one hand, the endless rise of world commodities prices and the great fall of the US Dollar are good reasons to back the Australian currency. Indeed, Australian exporters can take full advantage of rising gold, metals and energy prices.”
“Demand from Asian countries hasn’t flagged and you still have speculative flows on the relative future contracts too (investment demand). What’s more, the gap between US and Australian interest rates is widening. The Fed will probably cut rates again tomorrow, maybe by as much as one full percent if the futures markets are to be believed.”
“The RBA, on the other hand, may still raise the cash rate by a quarter point at its next meeting. Those different monetary polices are explained by the fear of recession in the US and the fear of inflation in Australia. It should be bullish for the Aussie.
“On the other hand however, there is a new event on the FX markets which is bearish for the Aussie: the liquidation of carry trades. Those long-term positions were based on the different interest rates on government bonds in different countries (a basic carry trade being to buy the high yield currency and sell the low yield one).
“The dominant carry trade of the last few years was a strong bearish force for the Japanese Yen. It was cheap for global speculators to borrow the yen because of ultra-low interest rates in Japan for years. Since last November roughly, investors become more and more risk averse, fearing a global slowdown and the unknowns of the credit crisis.
“So what have they done? Yen carry traders are getting out of long-term winning positions to lock in profits. They’re also making a big change in their asset allocation, which should favour commodities. That’s why the Yen is currently in a massive up trend. It’s rallied against all the high yield currencies, including the Aussie. And the U.S. dollar…well you have to see the chart to believe it.”
“The chart shows the fall of the US Dollar index during this past year. It also shows its next important level of resistance (which was previously its main support). As you can see, the index tried four times since last October to break the down trend. It failed four times. The dollar doesn’t have any support.
“If, by some miracle we haven’t foreseen, the dollar index rallies above 76, it will break its technical downtrend. The downside is much harder to figure, mainly because the dollar index has never been this low before. How low can it go? In a world of floating exchange rates, it can go much lower. But tomorrow we will look at the dollar in terms of gold to get a better idea.”
“Technically the AUD is still in a bullish channel against the US Dollar (chart below). However the parity with the Greenback might be more difficult to reach than you imagine as the main resistance between 0.94 and 0.95 has been holding so far. On the downside the pair found some support yesterday on the 50-day moving average at 0.9125, which is also the support line of the current medium-term bullish channel.
The Daily Reckoning Australia