AUDUSD for informed traders

I figure the Aussie is really worth only $.87 and the Kiewi $.73 in US Dollars, judging by the cost of hamburgers. http://www.forexfactory.com/images/icons/icon9.gif

Yes, selling Ag and Au might be a good move right now; but then there is the tax to pay. Then again who knows? We might see Ag=$100 and Au hit $3000. The down side to holding precious metal is we know the mining companies are going full throttle; and they will eventually flood the market, driving the prices back down. It is just like Bernanke printing Dollars, except the Fed presses are running 24/7. http://www.forexfactory.com/images/icons/icon7.gif

I think its more like this:

http://jessescrossroadscafe.blogspot...charts_04.html

By the way it is nothing new.

Cheers

Hi Anne,

Looking at the "driver" charts for AU and NZD, (EUR/AUD and EUR/NZD) we can see the extremely strong support for both these currencies. In an ugly sister contest, the prettiest of the crowd is likely to win the most favour.

With such aggressive selling on the crosses over Thursday/Friday last week, it is quite possible that AU and the Kiwi will be seen as the "who ya gonna call" option given that both the Euro and USD should have bags over their heads.

It isn't always about facts and logic, or the relationships between comm dollars and their equities/oil drivers, it's more often about capital flows and parking it where you will get the best return + the perceptions of large investors (until such time as the contrary evidence re AU & NZD is incontrovertible).

It will be very interesting to watch the PA unfold this week. When the hedgies get short the crosses like this, it can get real ugly.

.

Hello Jade... as you probably realize, I pop in here from time to time to give my take on the Aussie dollar. Troubling times for commodities at present, and without doing my usual and entering into ruminations upon the funnies, I do expect a rocky ride for a while.

Apart from that, hope all else is good with everyone, and that next week is kind to the positions taken by anyone.

A fellow Aussie trader found and sent this to me - AU chart since 1900 (in the PDF file) - shows AU at $2.40 per USD and argues that AU is in the midst of a longer term upswing that should remain sustained for many years to come. Authored by Dr Shane Oliver, Head of Investment Strategy and Chief Economist, AMP Capital Investors.

A longer-term perspective on the Australian dollar
The general consensus seems to be that the A$ is way overvalued
and that parity and above is unsustainable. By contrast, we think
parity and above is sustainable. There are several reasons for this.
Firstly, most fair value models for the A$ have been estimated over
a relatively narrow period of history, i.e. the period since the A$
floated in 1983, but this misses the longer-term perspective and
the changed fundamentals now facing Australia.
Secondly, most of the factors that drove the long-term slide below
parity for the A$ have now reversed. In 1901, the equivalent of
A$1 bought US$2.40 and for most of the last century the A$ was
above parity against the US$. The long-term slide from 1901 to a
low of US$0.48 in 2001 reflected a combination of soft commodity
prices and a perception of Australia as a mediocre, poorly-managed,
inflation prone “old” economy.
A$ back at more normal levels after a long slide
Source: Thomson Financial, AMP Capital Investors
These drivers have now all turned around. Commodity prices are in a
long-term upswing and Australia is seen as well-managed with low
public debt, inflation under control and relatively high interest rates.
Thirdly, the global financial crisis has exposed a fundamental
imbalance in the global economy, which is a high level of
consumption and/or public debt in major advanced countries in
contrast to low consumption and low debt in emerging countries.
Part of the adjustment to rebalance the world is that currencies
in the US, Japan and Europe need to fall relative to those in the
emerging world, and also against currencies that benefit from
emerging world growth, such as the Canadian and Australian dollars.

In short,

it is likely the sub-parity period from the 1980s was an

aberration for the A$, and the improvement in Australia’s relative
fundamentals suggest it is likely the A$ is going to settle above
parity against the US$

. Forecasting currency levels is an impossible

task but I expect an average around US$1.10 in the years ahead,
unless the global economy collapses again. This would be consistent
with the high terms of trade.

The impact of a rising Australian dollar on the
economy and shares
The strong A$ is great news for Australian consumers as it will
result in lower prices for imported items such as cars, clothing,
petrol and many electrical goods. This in turn is likely to take
pressure off inflation and reduce the extent to which the RBA
will ultimately have to raise interest rates.
For the broader economy and shares, a strong A$ is often seen as
bad news as export and import-competing companies become less
competitive. With around 30% of listed company earnings sourced
overseas, a 10% rise in the A$ will cut earnings by about 3%. This
would suggest a rising A$ is bad for the Australian share market.
however,

the actual relationship between the A$ and the Australian

share market is ambiguous

. In fact, over the last decade a strong

A$ has gone hand in hand with economic strength and a weak A$
has correlated with economic weakness. The reason is, that while
a rise in the A$ is a dampener for company profits on its own, it’s
normally associated with strong economic growth which is good
for profits. Given the latest bout of A$ strength has been associated
with renewed vigour in commodity prices and improved optimism
regarding the global outlook, it’s unlikely to cause major problems
for the share market or the economy at an aggregate level. This is
because the direct negative impact on profit growth from the surge
in the A$ should be largely offset by the positive impact from solid
economic conditions. however, the strong A$ could remain a drag on
the relative performance of Australian shares against global shares.
From a longer-term perspective, the rise in the A$ will present
challenges. It’s helping to shift economic resources to the stronglygrowing
resources sector of the economy, which is appropriate
from a technical economic perspective but such restructuring will
invariably have significant social and regional consequences.

The strong Australian dollar and investors
For investors, a rising A$ reduces the value of offshore investments,
unless they are hedged back to A$. Global bond and property funds
are usually hedged to remove the currency impact. Fully hedged
international equity funds are available.

With the A$ likely to see

further gains over time, there is a case to remain biased towards
hedged international equity funds as opposed to unhedged funds,
although not as strong a case when the A$ was well below parity

.

Dr Shane Oliver
Head of Investment Strategy and Chief Economist
AMP Capital Investors

The fact Aussie had relatively mild inflation was partly due to the strong $A, because they import so many.

If Commod down, $A down, then inflation will not necessarily go down, it will more like to go up. Glenn Stevens is a good central banker, when he say inflation will go up there must be a reason behind it. I think he already factored the drop in commod price in that decision.

No offense but......

Head of Investment Strategy blah blah blah = Investing other peoples money and make sure that commissions and management fee's are paid to he's employer AMP whilst reciving a bonus on top of a highly paid wage based on sales and not performance.
Parity yes, $2.40

The western world economy's are basically broke, Australia has a lot of gold in the ground but none is owed by its people, whilst the private liability's (people's debt such as mortgage, credit cards) are enormous and without the mining boom there would be no growth.

Appreciate a good laugh Monday morning.

Cheers

It was an interesting piece to read because historical information about AU that goes that far back is very hard to find. And yes, every fund manager has their own agenda, but that doesn't necessarily invalidate the opinion which was clearly labelled as the longer term picture. It was written on March 30, 2011 (if you read the pdf file version). What was valuable in the article was the contention that AU can become unpegged from commodity prices and perform on it's own merits.

No-one is saying AU will go to $2.40 again (unless you have a spare 20+ years up your trade sleeve), but if you made that assumption and found that amusing then please do enjoy. AU has done remarkably well of late, including during times of equities and commodity pullbacks (unlike it's previous behaviour of being thumped during pullbacks) - this is just something to keep in mind, i.e. if you are going to short something, AU may not be the best choice.

This aside, I rather liked the cup n handle forming on the very long term historical chart. Given that higher time frames always rule the day in forex, this provided some interesting background information (not that it would influence trade decisions today or tomorrow, but the wider historical context is always useful). That plus the rarity of locating a historical chart that goes so far back, it did seem something that would be of interest and worth sharing with others who may not have access to such information otherwise.

Cheers and good trading.

Now an interest rate rise is being talked up by who ? The banks? Journo's? Economists?
So why?
Well floods have forced food prices up.. one off event?
Electricity prices up- Govt stuff up
Oil prices up - international event
House prices peaking- deflationary?
Retail sales down- deflationary?

Australia is experiencing a commodity boom 'Golden Era" but very little is been shown into the mouths of the Australians. In fact despite the "golden era" many households are suffering worse than before GFC.
Ask any overseas visitor how expensive Australia has become and they will say " being ripped off" rather than inflation.
As some may deem an interest increase "a currency benefit" there comes a point whereby a tipping point emerges..Given the household budgets are tight it will be interesting to see how many more tightening notches RBA can go before riots in the streets.

Yes, it is quiet interesting to look back that far, having said that a lots has changed over the last decade, in fact the last decade has accelerated that quickly one must remember when the A$ was at 2.40 people traveled by horse or steam trains and ships and that is only one example. Today we have a world totally interconnected in every bit of life. A decade ago the goal of a country was to be independent in any sense to be able to survive and prosper. Today's style of doing business and politics has not been trialed for the worst case scenario, in fact we are just about to learn the faith of what could happen if country's depend on other economy's for growth, credits, food and the list goes on.
In my opinion any historical data beyond the second world war area is not reliable to predict or judge a current situation in year 2011 and beyond, humanity has evolved tremendously since then and that has not been build into those so called models.

Cheers

Yes true, lots has changed. However, reading that article just caused me to think again about the notion that we are seeing a shift in the global balance and that many analysts/economists and others have suggested that the pacific region is where the growth powerhouse lays. Although I am among the first to recognise AU's shortcomings (e.g. the grapes are rotting on the vines this year, it wasn't worth the vintage, first time ever since the planting boom indicating the balance between supply and demand has been tipped, not just for the wine industry aka GDP/export industry impacts)... compared to the problems elsewhere, AU is still looking very attractive to foreign capital.

lol, i guess many uni professors are working part time here

mate you are right. Australia is an expenssive place to live. Specially cities like Sydney, Melbourne. But the wages are much much higher as well comparing to USA. Say in USA hospitality workers/food handlers gets $3-$5 / hour. Where in Australia the minimum they gets about $18-$22/hour.
Minimum wages is Aussie is $34k.

expected it to hit 1.05 last week but it didnt..
You can see how strong the Aussie was in the global market.
People from China and Japan was pushing Aus $ consecutively compared to US dollar.

This week should be a rising week for Aussie.
Trade @ 1.0765 now.
But - based on the technical indicator - high probability it will hardly hit 1.1 again by this week.

Portfolio Updates: No change.
Stay @ sideline to watch a good entry point...

Going to the USA even with 15-20% tip its still cheaper than in Sydney.
I feel for the lower income worker on that sort of wage relying on a tip to get by though.. disgusting..

Target@7260

Of course you're right. However in normal situations I think the carry trade should be less strong simply because of risk. In my opinion the reason why the carry trade is so strong now is because carry traders don't believe that risk exists anymore. The "new normal" now is that the AUD will be perpetually high, the chances of any sort of reversal is slim and hence they feel "safe" going all in. The decoupling of the AUD even from commodities and the whole new normal, there is no risk, talk just makes me suspect that the AUD is in a bubble.

The big danger for Australia if the AUD is in a bubble is that the whole economy might irreversibly align itself with a high AUD such as the destruction of all industries except mining and heavy dependence of local banks on foreign funding (channeled into housing bubble), relying on the high AUD. Actually recently big Aussie companies like Woolies raised bonds overseas in US dollars because it was cheaper than locally. So any big drop in the AUD would hit those companies pretty hard debt-wise. Productivity has also been dropping consistently. I may be just a doomster but it has the hallmarks of another Asian Financial Crisis. There is no hard peg but there will be a quasi-peg beyond which the RBA will try to defend. As far as I understand it the Asian currencies were only really overvalued by 20%. The immediate trigger was an increase in arrears and a drop in exports. Though the fundamental reason was a massive uneconomical capital investment and drops in productivity due to huge capital inflows and a fragile banking sector which relied on said inflows. Recently there has been news of an increase in mortgage arrears (the first home buyers brought in by Rudd a couple of years ago) and flat/declining house prices. If that becomes bigger at the same time as a commodity burst it could lead to not just a drop in the currency but an actual financial crisis.

Still even if something is in a bubble doesn't mean it will crash anytime soon. So who knows how long this could go for really. I've been losing out in my bets on the AUD/USD until now so maybe I should really stop speculating on this pair.

Oh well, at least my silver bets made up for it.

It's too many people on the market worried about the wrong things....Price can only go up or down...Why make this difficult than it is? Keep it simple and confusion wont set in.

+1