Vantage FX | John Taylor says the Aussie is a bubble, Time to buy? | 14 May 2013

May 14, 2013

Stocks went nowhere overnight with the DAX unable to push on from its new all time high last week and the US markets unable to capitalise on the better then expect retail sales data for April which showed a rise of 0.1% versus last month’s 0.5% fall and this months 0.3% fall which was expected.

At the close the Dow was down 0.18%, the S&P largely unchanged up 0.02% and the Nasdaq 0.07% higher. In Europe the DAX was flat, the FTSE rose 0.11%, the CAC fell 0.22%, Milan fell 0.65% and Spanish stocks were weighed down by financials falling 1.01%.

But while the nuances and vagaries of one months retail sales data was lost on stock traders FX markets didn’t miss a beat embracing the strength as another sign of the growing US dollar pre-eminence – particularly against commodities such as gold and oil and also against the commodity currencies of Canada, New Zealand and Australia.

From where we sit this is a huge story as it reinforces the notion that currencies such as the Aussie and a lesser extent the Kiwi were safe harbours for US dollar bloc investments during the past few years and are now being shunned as the US dollar benefits from a stronger or at least improving economy and the Australian dollar in particular is pressured under the weight of a weakening outlook for the domestic economy, budgetary position and global economy. As we noted yesterday and last week rather than coming in to buy Aussie trader are looking to sell strength. We heard in the market yesterday that offers had been lowered to take advantage of any rally which is truly a sea change in sentiment from the buy dip mentality of the past few years. Indeed the NAB reports this morning that John Taylor from FX Concepts which is the world’s biggest currency manager has also layed into the Aussie saying it is in a bubble – readers know that we were there before all of these noted names have been hitting the wires.

And why wouldn’t you be bailing on previously held positive views on the Aussie. When the data changes you need to change your view and the NAB survey yesterday was just another reinforcement of the headwinds facing the Australian economy. NAB is expecting Australia to do OK economically this quarter but take a dip in the second half. Worth noting is that even though the employment data last week was spectacularly strong teh employment index in the NAB survey was a shocker – so watch that space.

All of which means that at present Aussie is searching for bottom and sits at around 0.9950 today and we still think that the 0.9857 level will offer material support in the short term so we are approaching a zone where our short might be turned flat.

As you can see in the chart above the AUDUSD is almost there now and the short term time frames of the dailies and 4 hour charts are getting into heavily oversold territory for the moment  so we might put a take profit into the market soon as noted above. Given the above and noting the article by Vincent Cignarella of the Wall Street Journal yesterday we might actually switch our short from AUDUSD to AUDJPY.

Looking at USDJPY it is close to some potentially significant overhead resistance, finally some might say. We have been targeting a move to 1.035 but our monthly charts show an old line that was previous bottoms in 1998 and then 2004 and a high in 2009 which comes in at 1.0229 and then there is the 1.382 extension of the 97-100 range which comes in at 1.0270 so we expect this zone to be solid. Interestingly as an after thought we ran a Fibonacci  ruler over the move from the late 1990’s high to the recent lows in USDJPY and 1.0251 is the 38.2% retracement level. So USDJPY is hitting a significant resistance zone.

Speaking of Japan there was a big move in JGB’s yesterday with the 10 year up 9 points which doesn’t sound much but was something like a 12% sell off. Low yields on long bonds equal huge tick value and the longs would have taken a huge wack to their P&L. As you can see in the chart from Bloomberg below yesterday’s move broke back above a trendline which had been a previous floor but there remains  2 year overhead resistance in the next few points and a five year trendline comes in around 1%. If the point of BoJ QE is to raise inflation expectations then bonds by definition should also rise but we’d expect the BoJ to see this as unhelpful and enter the market sometime soon to drive down yields or at least cap them under 1%.

Rates in the US were also a little higher after the Hilsenrath article we talked about yesterday and the stronger than expected retail sales. Realistically a withdrawal of Fed stimulus and buying does put natural upward pressure on rates so there is a rebalancing going on which will see rates find a level but that level is likely to be higher and as such will reinforce the USD’s support.

Turning to the Euro overnight and it was  little boring quiet range day but the GBP has come under pressure once again and this on is increasingly looking like it is going to have a round trip trade back to the recent lows. Is GBP Dollar Bloc? I’ve always thought it was at the margin, perhaps dollar bloc should really be called commonwealth as we’d put the AUD, CAD, ZAR, NZD and GBP all in a similar basket sometimes. Either way a move toward 1.5150 from the current 1.5269 looks in the offing.

On commodity markets Gold too looks like a round trip after failing in the $1475/85 resistance zone we identified on April 22 when we said,

this looks more like a reaction to an acutely oversold market for the moment than to anything looking like a recommencement of the Gold uptrend. It looks like there will be better long term buying opportunities ahead and we would be selling on rallies into the $1475/$1515 zone.

Crude was off as well falling 1.21% to $94.88 which reinforces the US dollar nature of these moves and clearly identifies the emerging US strength as the trend to watch.

Data 

Retail sales in New Zealand this morning and then CPI’s across Europe and IP for the Eurozone and Import Export Prices in the US.

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