We have already discussed Gold and Silver's technical setup, but for the keen observer of prices out there, and in particular the technical analysts amongst you, would have also noticed that the poster boy of the "Risk On" trade - the Aussie Dollar - is currently stuck within one of the tightest price ranges in over a decade. The price of the currency against its US counterpart is trading between the upside resistance of $1.06 and the downside support at $1.02 for well over a few months now. It is very much possible that a decisive break in either direction could signal a major trending move for months to come.
Chart 1: Australian Dollar will soon break out of its tight range
Source: Bar Chart / Short Side of Long
What I also find interesting, is the fact that despite the "bullish reasoning" which is fuelling the current overwhelming greed within risk assets, the Australian Dollar has actually failed to better its $1.10 peak from May 2011. Furthermore while the US, EU and GEMs equities have been rallying since November 2012, the Aussie has not participated in the rally.
In other words, despite all of the optimism, the Aussie has not actually performed well and furthermore has failed to confirm the new highs in the S&P 500 - which it has correlated so closely with since at least March 2009 lows. During times like these it is always good to apply old school wisdom which states that "when markets fail to rally on good news, they usually sell off very swiftly on bad news".
In other words, despite all of the optimism, the Aussie has not actually performed well and furthermore has failed to confirm the new highs in the S&P 500 - which it has correlated so closely with since at least March 2009 lows. During times like these it is always good to apply old school wisdom which states that "when markets fail to rally on good news, they usually sell off very swiftly on bad news".
Chart 2: Hedge funds hold very large bullish bets on the Aussie
Source: Short Side of Long
Obviously the question is, which way will the price break? While the best thing to do has always been to let the price decide (and that is what one should do now), my job here is to write opinions on the market prior to them becoming obvious. Therefore, I would also like to put forward two observations:
1. When I look at the positioning of hedge funds and other speculators, via the CFTC Commitment of Traders report, I tend to lean towards the bearish side due to the overwhelmingly bullish bets. Similar positioning was present prior to the 2008 crash, prior to the 2010 flash crash, prior to the August 2011 sell off and prior to the March 2012 sell off. So from a contrarian point of view, at least a correction and a shake out could be possible anytime now.
Chart 3: Commodity currencies have had a tremendous run since March 2009 lows
Source: Short Side of Long
2. The fact that the Australian Dollar as well as all other commodity currencies, have had a stellar run since the March 2009 lows, most likely indicates that we are overdue for a major correction. Consider that the Aussie Dollar was trading around $0.60 in the early parts of 2009 and has managed to rally all the way to $1.10 by May of 2011. In other words, the currency rate has almost doubled in the space of only a couple of years, which is very uncommon. A prolonged consolidation period is one way overbought levels can be worked off, but the majority of the time during downturns within the business cycle (which I expect), it is a bear market that does the trick.
What I Am Watching
I just love reading your blog. Great work as always.
ReplyDeleteOn this post; you say that the Aussie dollar may be poised for a spill. On your post yesterday, you say that Gold is poised for a continuation of the secular bull market in Gold.
ReplyDeleteIt seems as though they are not going to move in opposite directions due to the Commodity Currency aspect to the Aussie dollar.
Seems contradictory
Hi there. Let me clear up a few things, as there is no contradiction from my point of view.
DeleteFirst of all, I would like to say that almost all investors are constantly obsessed with correlations. There is an obvious reason why this is and it connects to central bank intervention. However, historically correlations between two assets (apples and oranges) eventually break down becauses apples follow their own fundamentals relative to oranges. Personally, I do not use correlations as much, and usually invest based on asset fundamentals.
Having said that, Aussie does not always follow commodities. It actually correlates a lot more with a business cycle and growth. That is because Aussie Dollars main fundamental drive is RBA interest rates and not the price of Gold. There have been many times in the past 10, 20 or 30 years where Aussie and Gold did not follow each other. Between 2004 to 2007 Aussie Dollar consolidated sideways, while Gold almost doubled in value. Between October 08 and March 09 Gold rallied over 30% while Aussie Dollar continued to follow S&P 500 lower into March 09 bottom. If anything, the Aussie correlates closely to the S&P 500 and the business cycle / interest rate cycle.
Finally, I admit that both Gold and Aussie could either break out or break down from heir technical ranges. It wouldn't surprise me if the US Dollar rallied and everything corrected, including the Gold and Aussie. When a tight range presents itself, the smartest thing to do is to wait and see the movement. But investing purely on correlations is like hoping apples and oranges will taste the same way. Yes, they are both fruit, but very different it their own way.
p.s. I have stated about a 100 times on this blog that when an asset moves up 12 annual / calendar years in the row, like Gold has, it could always be prone for a downside surprise in the not so distant future. Let us also not forget that despite a sideways correction of more than 1.5 years, Gold has not actually entered even a small bear market (Gold has even corrected 20% from the peak). But when an asset is in a bull market, investors (not traders) job should be to try and accumulate at lows and distribute at the final euphoric high. Therefore, if Gold does break down, its a buying opportunity and if Gold breaks out on the upside, its a buying opportunity too. At least that's the way I will play it.
DeleteThe commodity is secular bull market so a big fall of Aussie is not imment.That's why I no longer short Aussie
ReplyDeleteHowever,I will do that if 1) US recession>>>delflationary pressure>>commodity cyclical bear market
2) The end of commodity secular bull market
THe above two factors trigger the bust of Australia housing bubble that lead to the outflow of fund and reverions of valuaion.
Hedge funds trapped in the Aussie dollar? Who will buy to support the price or push it higher than it is now?
ReplyDelete