Aussie Dollar hits the skids as emerging markets hammered

August 20, 2013

Recap

  • The emergence of a developed world recovery (at least against expectations) and the submergence of the BRIC’s and other emerging markets is the big story to start the week as India, Brazil and Indonesia are getting hammered by selling in stocks and their currencies at the moment. It is no surprise as we showed last week with the chart of the Citi-economic surprise index for G10 versus the BRICS and EM which you can find here.
  • The Aussie Dollar (0.9110, -0.70% and off a high of 0.9232) looks like it might have been caught up in the maelstrom as well given that if there is a developed market recovery there is no need for the safe harbour that the Aussie has offered for the past few years and given the noise in emerging markets might see it providing a bit of liquidity as well. I’ll have a look below to explain.
  • On other FX markets things were a little more quiet day on day relative to what happened to the Aussie and EMkts. The Euro (1.3337, +0.08%), GBP (1.5651, +0.22%) and Yen (USDJPY 97.51, flat) haven’t moved much given the lack of data or catalysts overnight.
  • The selloff in interest rates was the other big story, perhaps bigger story, overnight with US 10 year rates up a further 5 points to 2.88% and developed market sovereign 10’s were all higher as well as money is clearly being pulled out of the way of the recovery, the Fed and the Taper. Bunds closed at 1.90% while Giklts rose 5 points to 2.75%.
  • Stocks didn’t cope very well with the emerging market sell off not the rise in rates with US markets closing on their lows for the day. The Dow was 0.47% lower, the Nasdaq fell 0.38% and the S&P was down another 0.59% to 1646 for a loss of 10 points. Europe also saw a sea of red with the southern markets of Italy (-2.465) and Spain (-1.86%) leading the charge lower. The CAC fell 0.97%, the DAX 0.31% and the FTSE was 0.52% lower.
  • The sky just might be falling and probably only weak data now can stop this run in bonds higher and stocks lower and emerging markets well…not much can help there for the moment.

Huge day for the Aussie today because if, or if not, teh RBA minutes are dovish the Aussie is going to move and likely aggressively. The RBA Minutes from this from this month’s meeting are out at 11.30 and over the next 24 hours we also see the release of Kiwi inflation expectations, Japanese All industry index, German PPI and Chicago Fed Index.

Blue skies a risk to the Aussie Dollar

For a very long time over the past few years all and sundry have been talking about the Aussie Dollar and Australian assets being a safe haven. I had no truck with that idea as I held that the Aussie was just a port in a storm, a safe harbour if you will. And just like the Australian banking system is buttressed by and economy going nowhere and households and depositors scared of risk when the sun comes out the support can evaporate as the money parked in the safe harbour is redeployed.

SO it seems that blue skies are a risk to the Aussie dollar.

I don’t know why I didn’t cotton onto this one sooner and raise it as a risk to the outlook and a handbrake on any appreciation and while it doesn’t mean the Aussie can’t rally up to 0.9300/50 and perhaps as high as 0.9500/0.9600 the reality is that investors are probably now looking for destinations for their capital that offer the best chance of capital gain and with the Australian economy’s and our trading partners challenges that is not on the big island in the South Pacific.

Indeed last nights Aussie selling started around 8.00/8.30 pm Eastern Time in Australia and was, it appeared synchronous with a rally in the Euro to its highs of the days and a huge spike in the EURAUD rate as you can see in the chart below.

But of course there is correlation and there is causality and the one without the other means you are just matching ideas in a baseless fashion.

But I think there could be something solid in this insofar as crosses such as the EURAUD, GBPAUD, AUDNZD or indeed another other cross of this sort in any pair can be a great trading tool in times of transition and uncertainty. The reason for this is that by doing a Euro versus Aussie cross or a Aussie versus Kiwi cross you take out the big uncertainty of the ebb and flow of the US dollar and allow yourself as a trader or investor to focus on the relative merits of the two investment destinations, monetary policy, fiscal policy, data flow, Current account and so on. And you can do all this without get whipped by the US dollar vagaries in this period of transition and uncertainty as we discussed yesterday.

Now, many traders are scared away from the crosses because of the spreads that they sometimes trade in but if you do the math of the relative spreads of both sides of the cross you can often see why they might be a bit wider. But equally because these can be a real way to express a fundamental view while some of the big ones (EURJPY, EURGBP and so on) can be traded short term many others should be dealt with for longer holding periods.

Anyway the Aussie may be losing its safe harbour status per se but at times of USD uncertainty cross plays often offer themselves as a safe harbour in themselves.

RBA important for the Aussie today

The RBA cut this month and the market read the communique as a sign that they had dropped their easing bias. While they certainly may have now with the emergence of the better than expected data out of the G10 (not here at home) the minutes are possibly going to reflect a more circumspect outlook for the economy. Now of course on the day of the meeting I said that I thought the communique would be sanguine because it was an election after all and the RBA didn’t want to be a political football. So, the minutes might reflect the same which is likely to support the Aussie versus the US dollar outright but the sell off from a marginal new high yesterday was so aggressive it will take USD weakness to drive it up through this level probably.

The market in front of us is neatly summarised above. We currently have a small box, or range, within a broader box, or range.

I’m still short but I reduced that position by about a third in the past 24 hours as the AUD fell as well as making a few points on other sales yesterday. I’ll see how the Aussie looks after the RBA.

Good Hunting and all the best

Greg

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