Monday, August 19, 2013

Powdered Milk versus Iron Ore

The end of Quantitative Easing (QE) in the US has been well signalled and if the monetary authorities Stateside have anything to worry about now it is the extent to which such tapering will be the cause of volatility in the markets, and in particular in Foreign Exchange. Traders are, or should be, now focused on how to profit from moves by the Federal Reserve to rein in its bond buying program.

The battle between very large economies, such as the USA and Japan, to depreciate their currencies relative to each other in the interest of achieving growth has had some side effects on other, smaller economies, not all of them welcome in the long term.

One example is how the global economic situation has affected those antipodean neighbours, Australia and New Zealand. Not all of their rivalries are on the rugby pitch. Many FX traders have succeeded in making a decent living from the way their respective currencies interact. Each has had to vie with the other to decide who would have the highest yielding currency (read high interest rates) in order to avoid a bubble economy due, largely, to external factors. While the Kiwis have had to worry about global trends (with particular emphasis on China) in Powdered Milk prices, for the Aussies it has been Iron Ore (ditto).

All this has been of considerable interest to the Carry Trade.

There is general consensus that both the New Zealand dollar and the Australian dollar need to have their values reined in, and this will happen against the backdrop of US tapering. Already, in May of this year, New Zealand authorities intervened in the FX markets to effect a reduction in the value of their currency, while the Reserve Bank of Australia (RBA) has embarked on a round of cash rate cuts to achieve the same purpose.

There is little doubt our friends in Oz are winning this particular battle. The chart above, of the AUD against the NZD, leaves little doubt about this. When intervention by the NZ central bank took place the AUDNZD rate was north of 1.20. It is now just above 1.13, having broken through a significant support at 1.20 which, as well as being a nice round number, also coincides with the location of the 200 period Simple Moving Average (SMA) on the monthly chart (blue line).

Rather than sell the AUD against the NZD, however, we will continue to promulgate a short view on the AUDUSD as being the most probable of all three pairs (AUDUSD, AUDNZD or NZDUSD) to give the greatest opportunities in the present circumstances.

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