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CashBackForex - Often Imitated, Never Duplicated!
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Australian Dollar Rallies with Global Equity Surge
Submitted by Ralph Shell
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1:49 PM Jul 20 2011
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2086 Views |
2 Comments
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 (5 Votes)
Australia has been a favored destination for the those seeking higher yields, and safely removed from the debt negotiations in the US and the Eurozone. The A$ did retreat to a low of 1.0390 on June 27, 2011, and then rallied close to the 1.08 handle on five different days. When the rally began it is note worthy that the open interest in the CME futures market was only 95K contracts. As the market has advanced, so has the open interest. On yesterday's rally, the OI increased almost 4.9K to 129K total for futures only (options excluded).
This of course raises the question, has the market gone up because of news concerning economic events? Or is speculative buying causing the market to look good, so other specs join the festivities. Trading pairs, this can be taken further. Is the buying in the A$, caused because the outlook for another currency looks bleak.
In the most recent COT report for data through July 12th we note the specs have added to their longs, and are now long 85,168 contracts. This is up from 55,205 contracts on June 28th. Much of the buying has come from the large spec, probably funds, who are now approaching a 6 to 1 long. Despite the concentrated buying, this has not yet pushed the market back to the 1.08 area where buy stops are likely located.
The Australian economy has been buoyant, largely as a consequence of the mining sectors ability to supply Asia with much needed commodities. Fearing inflation, the Reserve Bank of Australia responded with numerous rate hikes, taking the bank rate to the current 4.75%. In the most recent meeting, the RBA kept the rate unchanged, and modified it's hawkish tone, stating a patchy domestic economy, and the risk of a European financial crisis were their concerns.
The RBA's concern for the countries economic activity level was confirmed in today's Australian WSJ, an article entitled:
"Economic activity near 2yr low, Westpac, Melbourne University index shows...
CRACKS continue to appear in the veneer of the Australian economy, with a leading indicator of economic growth crashing to its weakest level in May since September 2009, while further evidence emerged of a slump in consumer demand.
The Westpac-Melbourne Institute Leading Index showed an annualized growth rate in May of just 1.6 per cent, down from 2.2 per cent in April. The indicator, which attempts to forecast economic growth over the medium term, has been pointing to a below-par performance by the $1.3 trillion economy since February."
The Western Australia mining boom continues, and the growth rate in Western Australia is sizzling, however other sectors are lagging. Compounding matters is the leadership of PM Julia Gillard, far more interested in her proposed carbon tax, and the billions of government money invested in wind farms and renewable energy.
This does not seem to be the backdrop for a currency that is going to march into new high ground. If the specs continue to buy, this can be a set up for a short squeeze, a dangerous situation. Remember, however, it is the commercials who are the biggest shorts, so they may not be quick to run.
Going back to the charts, we are in an area where the market has stalled before. Local Aussie news, not that positive, seems unlikely to forge above to new high ground. The economy is slowing down, rates are unlikely to work higher, and the administration there is seen as increasingly hostile to business. This is not a growth formula. My trading choice in the AUSUSD is to wait, hope for a rally that takes out stops, and then sell it when it fails. Perhaps this is too much to ask, so it is probably best to just wait.
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Shortcuts and Syndication
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Author Bios
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Ralph Shell: Ralph did his graduate studies in economics and history at Duke University. He has ten years experience trading cash commodities in domestic and export markets and is a former commodity analyst with Merrill Lynch in Chicago. He was a member of and floor trader at the Chicago Board of Trade for 18 years.
Forex Captain: The Forex Captain has been a strategy developer and forex trader since 1998. From 2002 till 2009 he ran a successful managed account based on his tradestation coded strategies at FXCM. In 2007 his managed fund was ranked in BarclayHedge Rankings as one of the Top 10 Currency Traders managing less than $10M & more than $1M. Since 2009 he has been developing Expert Advisors in MQL4 for private trading, and from June 2010 he has joined the Project Triumph team as a currency analyst and project manager.
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