Thursday, 6 February 2014

Time For An Aussie Rally?

Ralph Shell, Excel Analyst

The Aussie (AUDUSD) has been in a sell-off since October when it was trading above the 97 handle.  The bears responded with numerous calls to sell.  Probably the greatest clarion call was that of the Reserve Bank of Australia Governor Glen Stevens who decided the Aussie dollar was priced too high.  The ideal level, according to  the his analysis, should be below .85.

Then, it would be, sell the Aussie, a "risk off" economic number has been reported somewhere in the developed world.  An especially severe "risk off" situation would occur when bad news would come from China.  Since China was the biggest destination of Australian exports this event would hit the Aussie quite hard.  After all, the massive Chinese lending and spending boom has tapered off but it has not stopped.

Historically, China's biggest import from Australia has been iron ore, which has slowed but it has not stopped.  In October, the price of iron ore delivered China was about US$ 135/ MT.  Now the February delivery to China is worth between $US between 105/110 mt.  Since the demand remains at about 65M m/t tons per month the trade has not stopped but the value has decreased.  Yes, there may be a contraction in the Australian trade may slow but it is not likely to stop.

Further, if we go back a year, we find Central Bankers in late 2012 when the A$ was at higher levels, these CB's  were busy putting the A$ into their reserve currency portfolio.  

Bloomberg on 27th February 2013 reported that as many as 34 Central Banks held the A$ as part of their reserves.  This, despite the fact the A$, then trading above 1.02, was reported to be 10% overvalued, there was Central Banker demand.  At a discount, currently under .90 will the currency buyers with the deep pockets view the Aussie now has more value?

Trade on the first day of February, with a sharp global sell off in equities, did not result in the "risk off " chant the bears had hoped to hear. Instead the musings of the RBA Governor, that the current bank rate was about right and further adjustments were unlikely revealed there were too many shorts.

When looking at the the previous day's COT Report we observed: "The A$ remained a favored short for specs.  The total spec short was 86.9K (IMM contracts) little changed from last week's 85.5K.  The market is due for a short squeeze, but when?"

The sharp rally on Monday hurt the overextended bears, but we all know one day is usually not a trend changer.  Further, there remains the possibility for volatility inspired by reports from the ECB or from the US NFP Report.  Should any of these report send the A$ back to the 88 handle, we are inclined to be a buyer there.  We doubt the short squeeze has commenced in earnest.  A bounce to the 93 handle is possible. 

As always, manage your money.
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