Tag Archives: australian dollar

Oversold Aussie Dollar Due to Bounce

The Australian Dollar has slid nearly 9% in just the last month. We were exceptionally suspect of the rally that took place between February and April, as we didn’t see commercial trader confirmation of commodity demand, Australia’s primary industry, supporting higher commodity prices going forward. In fact, our data sources made us suspect of the entire metals and energy rallies we’re currently seeing come to an end. This is one of the primary values of tracking the Commitment of Traders (COT) report. It provides a tally sheet for fundamental supply and demand. Recently, we’ve seen some commercial traders nibbling at the long end of the Aussie Dollar and, given its recent decline, we feel it is due for a tradable, short-term pop.

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Australian Dollar Rally Meets Resistance

We stretched this chart of the Australian Dollar out over a longer timeline in order to show nearly the complete decline over the course of the last couple of years since making the all-time high around $1.10 to the U.S. Dollar. The long-term nature of this chart also provides a good example of the commercial trader category’s typical behavior, both good and bad. Finally, we’ll tie this back in at the end as we are nearing a critical juncture in the Australian Dollar and, commodities in general.

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Weekly Commodity Strategy Review

Another week of good calls with two out of three trades well in the money and the third is still hanging on.

We began the week by sending our COTSignals discretionary customers a sell signal in the Australian Dollar on Sunday evening. The market opened Sunday night at $.8026 to the U.S. Dollar and hasn’t looked back. It’s currently pushing $.7800, accumulating more than $2,000 per contract thus far. We detailed this trade for TraderPlanet on Monday in, “Aussie Dollar: A Commercial Trader’s Perspective.”

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Supporting the Australian Dollar

The Australian Dollar has fallen around 11% over the last month. This is a very large and very rapid move for the currency of a major nation. How would you like to end up with 11% less in next week’s check? This is similar to what the average Australian will feel with every purchase of every imported good or service, just think of it as $4.50 gasoline and you’ll get an idea for the feel of it. Our outlook suggests that the change in the macro is correct but its initial impact has been over cooked.

The primary big picture changes that triggered this sell off are twofold. First, the slowing Chinese economy has been a primary destination for Australian raw materials. Secondly, the U.S. Federal Reserve Board announced its intentions to begin siphoning off the Quantitative Easing stimulus. This has triggered the unwinding of the carry trade.

China is Australia’s largest trading partner with total exports to China comprising more than 5% of Australia’s Gross Domestic Product (GDP). The impact of recent downward revisions to Chinese GDP has taken the wind out of the Australian economy.  The International Monetary Fund (IMF) cut their forecast for Chinese growth from 8% to 7.75% for 2013. HSBC and Barclays announced larger cuts in their projections and see Chinese growth at 7.4% rather than their previous estimates of 8.2% and 8.1% respectively for 2013. GDP forecast revisions of more than .5% tell us two things. First, economists aren’t great at forecasting when their margin of error is +/- 10% per quarter. Secondly, a .5% cut in Chinese GDP still leaves them in the enviable position of having the largest, strongest economy in the world.

The carry trade is based on borrowing cheap money from one country to buy assets in another country. The two primary components of a carry trade are the interest rate differential and the exchange rate between the two countries. The trade makes sense in a stable marketplace. Dollars borrowed in the United States at .25% are used to buy Australian treasuries yielding better than 3% and recently as high as 4.25%.  More importantly the Australian Dollar held its own throughout the global financial crisis. This made it a safe haven as the highly leveraged U.S. and Euro markets raced each other to the zero lower bound leaving Australia to benefit from both higher interest rates and currency appreciation. That’s a win/win in the carry trade.

The money that has poured into Australia can be seen in the rapid growth of their currency reserves. Foreign currencies were repatriated post haste during the financial crisis. Australia’s foreign exchange reserves declined from the all time high of more than $80 billion in May of 2007 down to $30 billion by January of 2008. Australia’s current reserves haven’t been this high since June of last year. June of 2012 also marks the low point for their currency in the last year.

The macro issues surrounding the global currency wars are beyond the scope of my day-to-day trading. However, the knee jerk response in the global currency wars due to Ben Bernanke’s suggestion that the Fed may begin to taper off the Quantitative Easing programs combined with the volatility in the Asian currencies and stock markets has created an overly bearish situation in the Australian Dollar. Their healthy balance sheet, excess foreign reserves and primary business of raw material and agricultural exports places them in a position to control the fortunes of their own currency, stock market and economy as a whole. They still have all the tools that we’ve already used to fight an economic downturn of their own. In fact, I’d say they’re holding a full clip while here in the U.S. we’re hoping we can pull back just long enough to reload. Therefore, the current prognosis lies in favor of a higher Australian Dollar going forward.

The commercial traders are well aware of the situation and they’ve been on a torrid buying spree in the Australian Dollar. In fact, they started buying in earnest once the Australian traded down to par (even money) with the U.S. Dollar, nearly doubling their net position over the last six weeks. We believe that the heavy commercial buying will cause the sell off to grind to a halt and protect us from much more downside risk. Therefore, we’ll be buying the Aussie as soon as we get some type of early technical reversal to trigger our long trade. We will then place a protective sell stop underneath the low for this move. Based on the current ranges and swings, we would expect to take profits between $.9750 and par to the U.S. Dollar.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Trading the Tsunami

The earthquake and tsunami in Japan are tragic and I don’t want to minimize the human devastation, loss and ongoing fear. However, it’s my job to try and explain how this has affected the markets and what I believe is yet to come. The markets’ initial reaction to outside shocks is based on its participants’ fear. The market sells off due to uncertainty. If you or I had direct investments in Japan, we would want to get out and convert to cash while we waited to see how things unfolded. It’s human nature to retreat to a defensive position when confronted with disaster, whether financial, physical or emotional. Japan’s stock market sold off 16% in two days.

The specifics of the disaster in Japan are tied to demand destruction. Japan imports nearly everything it needs to run. The disaster has massively cut imports. Petroleum products, food, manufacturing raw materials and more have slowed to a crawl. Australia is one of Japan’s primary import sources and Australia is an export driven economy.  As a result of this, the Australian Dollar declined nearly 3% immediately.

The other major component of demand destruction lies in Japan’s 30 years of dominance in the manufacturing sector. Japan no longer has the competitive advantage it once held in technology over the rest of Asia or, the labor advantage that it held over the United States. There is a great degree of uncertainty regarding which manufacturing facilities will be rebuilt and which will simply be relocated elsewhere in the world. Japan has lost a large share of its competitive advantages.

The massive mobilization involved in the rescue efforts combined with the destruction of Japan’s refineries and nuclear reactors will squeeze global petroleum supplies. I expect Japan to begin importing large amounts of refined petroleum products from the west coast of the United States. Our refineries are running around 85% of capacity, our crude storage tanks are nearly full and our trade relations with Japan are already in place. China’s Sichuan earthquake in May of 2008 killed 68,000 people and left nearly 5 million homeless. The scale of the military operations required to rescue people and stabilize the infrastructure pushed crude $20 higher per barrel in less than a month. Approximately 430,00 people have been relocated in Japan, thus far.

Once the people are safe, they’ll need to be fed. Every piece of food near the damaged areas will have spoiled. The growing radiation fears are already making their way into the food chain. Japanese people are afraid to consume food that may have been tainted. This will place a large strain on current grain and meat supplies. Current grain and meat stocks cannot be increased. Our inventories are what they are. Fixed supply plus greater demand means rising grain and food prices are on their way. Live cattle prices climbed more than 20% immediately following the ’03 blackout and power was only out from 4-8 hours. Obviously, the length of the outage is much greater in Japan while the population base is smaller. We’ll need more data to quantifiably compare the two.

The reconstruction process is the final phase to discuss. Financing the reconstruction will be difficult on Japan’s ailing economy; in fact this topic deserves its own article. Heavy equipment companies like Caterpillar and John Deere have already attracted some attention. Oil refinery companies will also benefit. Nuclear reactor technology is a short term negative as General electric has taken a hit even though Japan may rebuild their reactors. Commodity prices will rise as Japan re-stocks and this will be evident in meat and grain prices. Copper and steel will also see increased demand. The wild card in the reconstruction process is natural gas. The radiation scare may be enough to push the political conversation of natural gas to the front burner.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Uncovering Value in the Commodity Markets

Uncovering Value in the Commodity Markets

The electronic meltdown in the stock market also cued a selloff in many commodity markets. Typically, markets move in their own individual rhythms. However, when fear dispossesses logic and panic takes over, it becomes a case of sell first and ask questions later. As the stock market selloff accelerated and we watched the media reports of the riots in Greece, survival became the primary concern. Now that the dust has settled, it’s time to appraise the current state of the markets. I believe the shock to the system uncovered some fruitful trading opportunities.

First, let’s examine the context of the markets prior to the selloff. In the currency markets, the Australian and Canadian Dollar as well as the Japanese Yen had been consolidating near the upper end of their ranges. All three had been holding their own since the U.S. Dollar’s rally has come, primarily, at the expense of the Euro, Swiss Franc and British Pound. The same pattern appears in the metals and energies as gold, silver and platinum as well as heating oil, unleaded and crude had also had been consolidating near their highs.

Secondly, let’s consider the composition of the markets’ participants through the Commitment of Traders Report at these price levels. Commercial trader positions in the markets above were gaining momentum in the direction of their established trends with the only exception being the silver market. This means that even as the markets were moving higher, the traders we follow, commercial hedgers, anticipated higher prices yet to come. For our purpose, we track the commercial hedgers. Prior to the market shock, we presumed that we were in a value driven futures market and no one knows fair value like the people who produce it or, have to use it. In fact, it is precisely their sense of value that provides the commodity market’s rhythmic meanderings that swing traders love so much. Let’s face it, producers know when their product is overvalued and it should be sold just as well as end line users know when they should be stocking up at low prices.

Finally, in the wake of “Volatility’s Perfect Storm,” we have seen the commodity markets snap back from losses of 3% – 4% in the world currency markets to 7% – 10% in the physical commodity markets. This sharp selloff and snap back to the previous range of consolidation prices is called a “Spike and Ledge” formation in technical analysis and pattern recognition. Typically, this occurs when an outside force creates a counter trend shock to the market and scares everyone out. The fear of being in the market is replaced immediately by the fear of NOT being in the market and missing the move. The shock forces out the market’s weaker players while allowing the strong to accumulate more positions at better prices. This is why COT Signals has been kicking out buy signals since the meltdown. Following the commercial trader positions has allowed us to buy into oversold markets. Our targets for these positions can be calculated by adding the depth of the market’s decline to the top of the consolidation levels. If the market you’re following sold off 5% from its highs, a spike and ledge projected target is 5% above the market’s previous highs and a protective stop would be placed just beyond the spike.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk in investing in futures.

 

Mass Commodity Liquidation

The past week’s action has seen a large decline in many of
the commodity markets. We’ve seen declines in oil, platinum, copper, corn,
wheat, sugar, OJ and others. Therefore, one has to ask, “What is the
justification for such a broad based selloff?” The answer, in short form, can
be found in the Commitment of Traders report. I track the commercials and large
and small speculators every week. However, Steve Briese, author of Commodity
Trading Bible
, also tracks the Commodity Index Traders. This group makes up
the long only index funds that have been at the center of the Capitol Hill
rhetoric as it relates to high commodity prices. Over the last two months, we’ve
seen this group begin to liquidate their positions. Over the last two weeks,
they’ve begun to liquidate in earnest.

Certainly, some of the commodity markets have been trading
at prices far above any fundamental justification for quite some time. I’ve
written at length that there is little justification for crude above $100 per barrel.
Power outages in South Africa were a major contributor to the rise in platinum
and cocoa, as usual, is subject to the usual political and social turmoil. However,
the grain markets, have a substantial fundamental foundation to build from.
Just as there has been little justification for $140 oil, there is considerable
justification for “beans in the teens,” and corn at $6.50+ per bushel. In
general, this appears to be a case of, “throwing the baby out with the bath
water.”

Given the broad nature of the selloff and its corresponding
volatility, the most effective way to take advantage of a rebound in commodity
prices may be through the purchase of a commodity based currency like the
Australian Dollar futures. This currency is highly correlated to the commodity markets
and is also coming under technical pressure. The successive highs from June 6th
and July 18th were not confirmed by increasing open interest (black
vertical lines and lower magenta graph). Also, we have seen tightening
consolidation as the trend developed in ’08. Currently, we are sitting on the
weekly trend line at .9430. I would not be surprised to see the market violate
this trend. If the market trades down to its deeper support between .9221 –
.9321 and open interest does not increase on the violation of the weekly trend,
I think we have a golden opportunity purchase the Australian Dollar as a proxy
for a continued commodity based rally and further appreciation of the
Australian Dollar.