Thursday, February 13, 2014

The battle for the Pound | The Aussie in transition

A battle royal took place yesterday between the bulls and the bears over Cable, the GBPUSD currency pair. Although the Forex market is open 24 hours (even if most brokers close down their trading servers for about 48 hours on weekends), the main action takes place when the big players, the banks and hedge funds, have traders at their desks. So we talk about the European session, which is dominated by London, the American session, when New York is awake and at work, the Asian session, when Tokyo traders can have an impact and the Pacific session, when our friends in Sydney and Wellington, New Zealand, have the floor, so to speak.

Since the announcement by the Bank of England that UK growth is expected now to be considerably better than hitherto expected, two days ago, the pound sterling has been tearing ahead. Yesterday was another standout day for the GBPUSD pair and it is very informative to track the price action over some of the trading sessions mentioned above.

In the chart, it can be seen that buying began in earnest immediately after the London open. Then, as anticipated here on a number of occasions, the level of the 200 period Simple Moving Average (SMA) on the monthly chart came into play as a resistance level, of some strength. A battle between the bulls and the bears ensued until the New York traders got to their desks, when price exploded to the upside. Some American participants, it would appear, came to work, saw what was happening and decided it was time to have some of the action. These institutions got what they wanted and then sat back to wait, when the bull and bear battle began again.

And so it went on. Right now it would appear that the bulls have won the honours, but only just, and this could, of course, be reversed. However, as we always talk of the importance of having probability on our side, we have to declare that the dominant trend at the moment for Cable is to the upside.

 The Aussie in transition

The Australian dollar has been strong of late. This is due to short term factors, the most notable of which was the recent traumatic adjustment in emerging market currencies to take account of the proposed end of QE in the United States.

But the Aussie is in transition, as is the economy in which it is used. The currency became strong on the back of a serious increase in both the volume and price of its main exports to china, Iron Ore and other hard commodities. The increase in the value of the Aussie was actually needed in order to mitigate the effects of this development, particularly on wage demands at a time of transition to the commodity based economy.

Now all that is being reversed. Commodity prices are falling, mainly due to a reduction in demand from China. Just as that great nation must move to a domestic-consumer driven economy from one that depended on exports and government infrastructure programs, so must the Australians move to one that no longer depends so much on the extraction of minerals from the ground.

It can therefore be expected that the Aussie dollar will weaken further in the future. This will, inevitably, be measured against the US dollar, as this is the currency of international commodity exchange, and can, itself, be expected to appreciate as QE disappears and the day arrives when a rise in US interest rates will become a prospect. 

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