The pound Sterling against
the US dollar (GBPUSD) is powering aggressively in the upward direction once
again, on the back of the excellent February retail sales figures that were released
yesterday (GMT) – three times higher than had been expected according to a Reuters’
poll of economists.
This is the instrument in
which we had such goodtrading results last month (February).
The long-term trend here is
unmistakingly upward, even if it has taken a breather in recent weeks.
It is hard not to be conscious
of the fact that Cable, as GBPUSD is otherwise known, was at and above the level of 2.00 US dollars back in 2008, just prior to the meltdown that took place
as a result of the flight to safety in the wake of the Global Financial Crisis.
Are we about to start on the journey up to that level again, now that the
crisis seems to be fading into the past, at least to some degree?
Why is the Aussie on fire?
A few short weeks ago the
governor of the Reserve Bank of Australia (RBA), Glenn Stevens, and a number of his
colleagues, most notably Heather Rideout, were telling anyone who would listen
that the Australian currency was way overvalued and that it was essential for
the sake of the economy that it be weakened considerably.
At the same time economic
indicators in China , Australia ’s biggest trade partner, were less
than stellar, the cost of living in Oz was going through the roof and hard
commodity prices, of which Australia
exports a lot, were in the process of melting down.
So what happened? The Aussie
took off is what happened. Nobody listened to Mr. Stevens et al and traders
apparently ignored all the other indicators.
Or did they? We believe otherwise.
We believe that what took place is that a very large number of traders, some
capable of trading with sizeable positions, saw that the daily chart was apparently
forming a triple top against the 200 day Simple Moving Average (SMA) (see
chart), noted the conditions described above, and went short (sold the Aussie). They placed stops
(precautionary Stop-Loss orders) above the level of the 200 day SMA.
Then, for one reason or
another, price failed to respect this resistance level, and moved through it. Stops
were triggered, and they are still being triggered. We are, in other words, in
the midst of a classic short squeeze in the Australian dollar. A
Stop Loss on a short trade is a buy order. Traders who have them
triggered have exactly the same effect on the market as those who have taken a
view that the market will rise.
We had long been out of the
Aussie because our bias is to be bearish on this currency and our Mandelbrot algorithmic
routine will not allow us to hold a position when it is rising. Not only that,
it will only permit us to re-enter when its algorithm has identified the strong
probability that AUDUSD has started to trend down again.
Sure, this invariably means that
we miss the very top or bottom of a trend, but that is OK. It is the fact that
we are most likely to be in a winning trade that is of supreme interest to us.
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