Wednesday, November 20, 2013

Why still short the Aussie? The comments of Mr. Bernard Bernanke

Things are pretty good in Australia right now. The cost of living is high but the housing market is buoyant, to the extent that the authorities are concerned about a housing boom. Unemployment continues at the low rates that make other Western style economies green with envy.

China, Australia’s major trading partner, particularly for commodities, has just announced major changes to the way that mega-state is run, all designed to increase consumption internally, which can only be good news for our friends in Oz.

But we are still short the Aussie dollar. This is even in the face of a speech by Mr. Bernard Bernanke of the Federal Reserve in the USA yesterday, who committed to a low Federal Funds rate for the foreseeable future. In theory, this should lower the US dollar and assist the rise of the AUDUSD pair. So why did we set up the Silver Trigger to enter a short position, which was filled (see chart above), during the Australian session last night GMT?

Why did we also place a provisional short order for gold?

The answer is that hard commodity prices are still falling, and the share prices of Australian mining companies are following suit. The fact of the matter is that the Chinese measures will take considerable time to play out, and it almost certainly will not be plain sailing in the meantime. There may also be significant collateral and unintended consequences for the wider global economy. In the USA, tapering is coming and will be on the radar in a big way in the New Year of 2014. In Australia itself, there has to be a transition from a mining led economy to one that is supported by consumer spending. This kind of switch does not take place overnight and the Australian government is well known for its wish to have a lower Aussie dollar, in order to assist in this.

But the big consideration is that the market is telling us that the US dollar is on a rising trajectory. Every time there is a suggestion that tapering might be delayed the reaction in the Foreign Exchange space is not only muted, but also transitory.

And, for the record, the daily chart above shows a beautiful head-and-shoulders formation underneath a still falling 200 day Simple Moving Average (SMA).

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