How low will the Aussie dollar go?

September 12, 2014

This is not an advice column but I’m hoping as many readers as possible are with me and profiting from the fall in the Aussie dollar. As readers know I am a follower of Hyman Minsky and believe that the seeds of turmoil are sown during periods of calm.

From a trading point of view that’s just a fancy way of saying that when a range breaks there is likely to be a bit of momentum to drive the break further. Indeed it’s the basis of the turtle trading system when you think about it and the more solid and long (in terms of time) the range then the more propulsion the break will have.

Which is why I stayed short yesterday even though I wrote yesterday morning that the Aussie was likely to head back to/above 92 cents. I thought about adding to my position but to be frank I have too much other stuff on and am running a size which I don’t have to think about.

So I am still short and while the Aussie could rally into week’s end I am staying that way.

The reason for this is that the last 24 hours was one of the most important days trade in a very long time for the Aussie. Important not because of the rogue 121,000 employment number released by the ABS, but rather, important because it was the second time in as many days that the Aussie climbed back above 92 cents only to get hammered by the bears. That’s all you need to know – the darling of currency markets is now more as traders exit their longs and sellers are out from under the weight of the cost of selling Aussie as a result of the interest rate spread. It’s back at 0.9102 this morning after a low of 0.9087 and while it might rally over the day and into the week’s close the pressure remains.

There appears to be a de-risking of portfolios globally happening at the moment and investors are also clearly assessing the fall in commodity prices as being a big risk for Australia and Canada.

Elsewhere the Euro is sitting at 1.2920, Sterling is back up at 1.6252 and USDJPY is up at 107.04.

Turning to overnight trade on stock markets and there was no such excitement although US stocks started in the red and then ground their way higher over the course of the day. In the end the Dow finished down 0.12% at 17,049 but the Nasdaq and S&P managed to drag themselves back into the black. The S&P finished up 1 point at 1,997 from a low of 1,986 and the Nasdaq was up 0.12% at 4,592.

One thing worth noting about the US economy, markets, bonds and the US dollar is that as well as economic data supporting the notion of a recovery so to is the size of the US budget deficit. Last night the US Treasury reported that the August shortfall was nearly 420 billion less than last year. This suggests more tax receipts which suggests the economy is doing better – people don’t pay tax unless they have to.

This is important for the US dollar’s rally – or the continuation of it.

In Europe stocks didn’t see the recovery in the US and instead focused on the EU’s new Russian sanctions. There were only minor falls however on the continent with the DAX off 0.09% to 9,691, the CAC dipped 0.22% to 4,441 and the indices in Milan and Madrid dipped 0.23% and 0.47% respectively. In the UK it looks a bit like money is being taken off the table as a pre-caution to a Scottish independence Yes vote and the FTSE was 0.44% lower to 6800.

Locally the impact has been that the September SPI 200 contract has risen 5 points to 5,552 while the December contract is down 8 points to 5,551.

This SPI chart suggests  a market that wants to head lower.

In Asia yesterday Shanghai’s reversal of recent range highs continues as it looks like it is mapping out a trading range. The index fell 0.27% to 2,312. The Hang Seng dipped 0.17% to 24,663 but the Nikkei continues to bath in the glow of a weaker Yen up 0.76% to 15,909. We are still waiting for new loans in China and Japanese industrial production is also due out.

On commodity markets iron ore fell 14 cents to $83.42 a tonne for September and 60 cents for December delivery to $82.07. September Newcastle coal lost 10 cents to $66.10 a tonne.

Nymex crude rose 1.52% to $93.06, gold is at $1,241 and silver is down at $18.71 an ounce. Copper slipped under $3.10 a pound while on the Ags wheat fell 2.16%, corn lost 1.56% and soybeans tanked 3.41%.

On the data front inflation data across Europe will be interesting along with the very important US retail sales. Chinese industrial production and retail sales are out over the weekend.

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