We came back from the Easter
break yesterday to find that the Forex market seemed to have come around to the
opinion that Australian inflation was heading upwards with a strength that
would oblige the Reserve Bank of Australia (RBA) to raise interest rates in the
short term. It was hard to see where this idea had come from – it certainly did
not emanate with the RBA itself, which has been sanguine about threats to price
stability Down Under.
So pervasive was the
expectation of an increase in the CPI figure, due to be released at 1:30 AM
this morning in GMT terms, that our Mandelbrot routine exited from our short
position in AUDUSD yesterday when the rate here reached a level that was a
threat to profits. Then the authorities in Oz released the inflation figures.
They were way below the annualised 3.2% rate that had been touted throughout
the day yesterday, coming in at 2.9% year-on-year. The AUDUSD smartly reversed
and went in the direction we had been expecting prior to our exit. Fortunately,
we were still able to capitalise on the news as we also had a long position in
GBPAUD (see chart above), which is now performing nicely. Such is the power of
diversification.
Australian terms of trade and the end of the mining
boom
The sustained rise in the
Aussie dollar since the end of January of this year, which has been flagged as an issue by the Australian
authorities (see yesterday’s
commentary) has been due to a number of factors. One amounts to a somewhat
circular argument – that the reduction in the value of the currency over the
last quarter of 2013 has led to an increase in Australian exports and therefore
an improvement in the terms of trade, which is closely watched. Well, it would,
wouldn’t it?
Another has it that the
transition from a mining based economy to one that relies on consumption is
proceeding faster and better than expected. The rise in property prices in
Sydney and Melbourne, which many see instead as a bubble waiting to burst, is
pointed to as evidence of this.
In the meantime the part of
the economy that has been built on mining is still in decline. Recent evidence
of stockpiling in China and new regulations that free up Iron Ore mining in
India have resulted in a sharp fall in the price of that commodity. The Chinese
economy itself continues to contract and, once more, there is domestic
political pressure on for a fall in the Aussie dollar.
The OmiCronFX Mandelbrot routine is
watching for a suitable opportunity to re-enter AUDUSD on the short side.
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