The correction down off the 1.08 highs in the AUD/USD (and correspondingly the NZD at 0.8470) started after FED chairman Bernanke made no mention of QE3 in his semi-annual congressional testimony in early March. Through this period the market has concluded that the FED is finished with super easy monetary policy. I have constantly disagreed with this notion. Overnight, and on Monday, Bernanke has been quite clear. He views this recovery as weak and the recent improvement in jobless numbers as non-sustainable. My interpretation is that super easy is here to stay for a considerable time. Indeed the last FOMC minutes reaffirmed the commitment to that until ‘late 2014’.
Another focus affecting the AUD (and NZD) has been that Chinese growth is slowing. Firstly the Chinese themselves revised down their growth to (a still whopping) 7.5% and recent data releases have been weak. However I will contend that the very lengthy Chinese New year celebrations in the most important of all years (Dragon) are impacting on these recent releases and that we will soon see an improvement (Sunday’s PMI release?).
Looking at the charts, overnight the AUD/USD made a strong comeback precisely off my up-trend line off the October 2011 0.9400 low.
My suspicion is that the time to buy is upon us for a return to the dominant up-trend. That said, there is significant event risk in the form of the Chinese PMI released on Sunday and no doubt digested in the thin trading conditions of Monday morning.
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The option strategies profiled on 9 February (below) have performed excellently. Indeed, I had a number of clients try to express this view in ‘spot’ only to get knocked out with small profits in amongst the early two way chop before the cross took off. Guys with 3 month option strategies are up about 150% on investment at the moment.
Sent: Thursday, 9 February 2012, 12:58pm
Subject: EUR/AUD – another look (buy call option)
I have just been exploring other ways to capture this trade as I am very upbeat that Greece will come up with the goods in the next few days. Greece has come this far that it is unlikely to cock things up now especially now that the country is governed by non-politician in Lucas Papademos, a Greek economist who was previously Governor of the Bank of Greece from 1994 – 2002.
His appointment has largely taken the political ‘conflict of interest’ (not having to be re-elected) out of the way. Indeed all the charts, be it EUR/JPY, EUR/USD or EURAUD all scream that the smart guys understand the likely outcome of the PSI negotiations.
A 1 month EUR/AUD ‘at the money’ call option is ridiculously cheap in my opinion at 0.0175 points. The cross went up that far on Tuesday alone, let alone having the opportunity for gains over 1 month.
Look at the long term chart of the levels needed to profit (I’ll expand it on the 2nd chart).
A closer look shows that the average move per month over the last 3 months has been about 600 points (premium in this case 175 points) and we know the EUR market is terribly short.
If Greece defaults you have no further risk that your premium paid, no slippage, no surprises.
The last two weeks have been categorised by a sharp bout of USD strength.
Since U.S. Fed chairman Bernanke’s testimony to congress on the 8th of March, where he made no mention of another money printing program (QE3), the market has had it in their collective minds that the FED is changing course (super easy U.S. monetary policy has been at the very fore-front of FX moves since the GFC).
This is despite the fact that Bernanke, in his Q&A session at the congressional testimony, suggested that growth wasn’t following the improvement in jobs and that there was a ‘fiscal cliff’ approaching in the form of the withdrawal of some very supportive U.S government spending programs later in the year. Indeed in the FOMC meeting of last week, the FED reiterated their stance that economic conditions are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. Does that comment sound like the FED are about to change course?
So given my view that nothing has changed what can the charts tell us? Well everywhere I look the charts suggest that the USD strength was short term in nature and the bigger trends are reasserting themselves.
Exhibit 1 – NZD/USD weekly chart. A clear bullish hammer here last week with a similarly ill-fated trip south the prior week both suggestive that solid buying interest is present below 0.8180 (no closes lower than that the last two weeks despite dips toward 0.8060). Further the last 3 weeks appear merely ‘corrective’ to the bigger trend up off 0.7300. Note the gorgeous key weekly reversal at the 0.7300 lows!
Exhibit 2 – NZD/JPY weekly chart. Arguably the NZD/JPY is the ultimate arbiter of ‘risk’ and this chart is even more impressive. A fierce pullback on Bernanke testimony that was very short lived creating a very significant ‘hammer’ rejection followed by a seeming confirmation move higher last week.
Exhibit 3 – The Dow Jones Index. The share market does not look concerned about higher interest rates anytime soon as it surges to new 4 ½ year highs.
In summation the 3 charts shown suggest strongly to me that the focus on a FED change these last two weeks is ill-considered and the broader conditions that have been in play for so long are now reasserting themselves.
We are seeing USD weakness prevalent everywhere right now. Gold and Silver moving strongly higher, EUR at 4 month highs, NZD and AUD pushing at the top of 1 month consolidations. In Asia earlier today we saw SGD (Singapore Dollar) gap higher and now this news on China
SYDNEY, Feb 29 (IFR) – The PBOC has set USD/CNY today at 6.2919, the lowest level (or highest yuan value) since the 2005 revaluation
This feels to me like the 2010 when I often noted “if it’s not one thing making new highs against the USD then it’s another”.
THE NZD/USD is continuing to build on its gains firming to a session high of 0.8381, buoyed by solid domestic AUD/USD buying as well as NZD/YEN cross demand out of Tokyo which has seen the cross rally from 65.75 through 66.00 triggering follow through buying. Comments from Mr Bollard that “The income gap between NZ and Australia and other OECD countries may be smaller than it appears from official figures.
New Zealand’s gross domestic product, for example, could be roughly as much as 10 per cent higher than official figures suggest, when compared with Australia, he said.