Friday, January 24, 2014

Swiss franc is back | The price of Iron Ore and the Aussie

The Swiss franc used to be a good trading currency until the authorities in that country decided to intervene in the market to ensure that it would not fall below the level of 1.20 to the Euro. They did this because there was a fear that its status as a safe-haven currency would make it appreciate so much that the market for all kinds of Swiss exports would be damaged.

Now there is a new dispensation and safe havens are not as much in demand as they were. The global economy is on the rise. The Swiss franc has been quietly falling (USDCHF and EURCHF pairs have been rising), since the middle of last December. As can be seen in the chart above, higher highs and higher lows have been the order of the day. That is, until yesterday, when the franc took on a sudden burst of strength. This was caused by the Swiss monetary authorities significantly increasing the reserves that Swiss banks must hold. In order to fulfil their obligations they have had to buy Swiss francs, which resulted in the surge yesterday.

We believe this is a one-off and represents a possible opportunity. As soon as the effect is worked out of the system, the pairs involving the Swissie and the other majors can be expected to start to rise again. As soon as we perceive that this is happening we will look at the possibility of taking a position.

P.S: The bar with the long tail on the chart represents Dec 27th, in the middle of the Christmas and New Year holiday, when trading was very thin. We therefore regard this as an outlier, to be ignored for the purposes of deciding where a higher low occurs.

The price of Iron Ore and the Aussie

One of the greatest customers on the planet for Iron Ore is China. While they have their own mines for this hard commodity, they also import quite an amount of it from other countries, particularly Australia. While the Winter months in the Northern Hemisphere have traditionally been the time when Iron Ore prices went up, due to the fact that Chinese steel mills used this time of year to restock, this year the Iron Ore spot price is at the lowest it has been for the last six months.

This is bad news for the Australian dollar, for two reasons. One, it is a better measure of the way in which the Chinese economy is rationalising at present than any trade or business activity survey and, two, it means that the Chinese will be both buying less Iron Ore from Australia, and paying a lower price for whatever they do buy.

The sell-off of the Aussie this morning is linked into perceived weakness in China, combined with the racing certainty that QE in the US is on the way out. The fall in equities yesterday is part of the same process – the Federal Reserve does not believe that equities impinge that much on the real economy, and were ripe for an adjustment due to the fact that stocks were overvalued because of the availability of cheap money that followed QE when it was introduced in the first place.

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