The Aussie is closing the week looking like it is finally going back toward the recent range low of 1.0440/50 sometime next week. As you can see in the chart below this week’s move has reinforced the 1.0750ish region as the top and we now need to see where the real bottom to this range is.
The re-run of the pre-QE2 2010 rout in equity and thus risk assets looks to be accelerating and Chairman Bernanke’s speech and remarks this week seemed more of a shoulder shrugg that he is powerless to help as opposed to a nod to the fact he was going to suit up and once more become helicopter Ben raining money on the markets.
This may be the right approach but the markets pumped up on free money haven’t liked it because without their drug du jour they have to stay lucid and that means they must focus on the data – and its WEAK.
The Chinese import-export data was the catalyst, or excuse, for yesterday’s sell off although Dow and S&P futures in our timezone gave no indication that the we were going to fall 1.4% in North American trading. So I think that’s a furphy. I think its a recalibration of growth and thus earnings expectations.
And with apologies to Bill Gross of PIMCO I simply think that the bond market is right, as it always is in these things and has been in Japan for 20 years.
So equities are off bonds are down and with them a bit of investor sentiment, although the Aussie for the moment is relatively outperforming.
It’s probably worth having a quick look at the 5 drivers of the Aussie to see where we sit and what might be in prospect for the coming week, week’s.
- Interest rate differentials – The RBA kicked the chair out from under Australian rates this week and our market is rallying but so are developed world bonds. So this is a neutral/positive 1 month factor.
- Global growth/Commodities – the ECRI indicator is off for the 7th week in a row and data from the US is weak. To my mind China is clearly slowing and Europe is weakening also. Commodity prices in aggregate have yet to feel the heat of the sell off in equities or the shifting ground of economic data, most likely because the USD is still toward the bottom of its range. So this is neutral at present but likely to turn over a 1 month time horizon.
- Investor Sentiment/Risk aversion – if you look at equities in isolation you would have to say that investor sentiment is falling. The VIX is starting to push higher and looks to me headed higher still implying a growing sense of diswquiet in the investing community. Certainly not a risk off event yet as its focussed on equities but clearly a risk to the Aussie on a one month time frame.
- Technicals – The recent tradde as we can see in the hourly above says 1.0440/50 is a high probability short term but what about after that? I still hold to my views from ages ago that after this its 1.0359 then 1.0205. Unless or until 1.0441 breaks the Aussie is just in a 3 cent range but on a 1 month horizon, in the absence of helicopter Ben, the bias is lower.
- USD – For all of the above this is really where its at. I’ve thought and blogged for a while now that even though the USD’s weakness concerned me I didn’t think the globe could afford a USD rout. We have’t got it against the developed world as shown by the USD index and I continue to think the bottom is in. This will be a medium term negative for the Aussie directly against the USD but, if the EUR is going to struggle the Aussie should make up some lost ground on this and other crosses.
So all in all I would have to say the bear case for the Aussie is strengthening.
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