Tuesday, March 11, 2014

Iron Ore price collapse has implications for the Aussie | Our Forex positions

The price of Iron Ore has fallen significantly on world spot and futures markets. This is due to overcapacity in China allied to a drop in steel production there. So concerned are the Chinese authorities about this situation that they have started to forcibly close down steel mills. They have also let it be known that they no longer wish the Chinese banks to extend credit to steel producers.

All of this points up the wisdom of the Australian monetary authorities in attempting to transition their economy from one that had a large dependence on mineral extraction and export to China, the largest component of which has been Iron Ore, to one that is more reliant on domestic consumption and services.

The problem is that these transitions take time, and the Aussie economy is still bound to be affected by a slowdown in mining. Such a situation is not good for the Aussie dollar. Yet interest rates in Oz, while low by their historical standards, are still high by any global measure. This attracts the attention of carry trade (where traders borrow in a low interest rate environment, like Japan, and loan out currency in a higher interest rate jurisdiction, like Australia), and this tends, still, to strengthen the local currency, or to at least to prevent it from weakening faster. The reason for not reducing rates further is the fear, well realised even at current levels, of a housing bubble.

We will be watching for how the Austrian authorities handle this particular conundrum, with great interest.

Our positions in Yen, Aussie and Kiwi

Yesterday we opened positions in USDJPY (long), AUDUSD (short) and AUDNZD (short). All are still alive and so far moving in the required direction. All are, as well, under the control of our Mandelbrot software. We set this routine against gold also yesterday, on the short side, but the algorithm kept us out of a position. That may change. 

We are also watching Cable, or the British pound against the US dollar, although there is severe indecision here as it sticks very close to the support level established at the 200 period monthly Simple Moving Average (SMA), which we have alluded to previously. It simply does not know which way to jump from here.

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