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Nov 1 2010 - AUD in Focus. Equities on the Cusp

Discussion in 'Giant #2' started by Giant #2, Nov 2, 2010.

  1. Giant #2

    Giant #2 Former Special Consultant to the FPA

    Jun 19, 2010
    Likes Received:
    Forex Notes

    Hi Traders
    I will experiment with video in the near future for more detailed and understandable updates. This will allow me time efficient and more frequent updates.

    More support for AUD after today’s surprise rate hike to 4.75%. AUD continues to be on the front foot and we have been forced to raise our floor for pullback expectations on AUDUSD and AUDJPY.

    We have been cautiously rebuilding our core AUDUSD positions with tight risk control. The primary risk is a pullback in equities and commodities. There is limited opportunity for capital gains at current levels and we are building on retracements to AUDUSD .9700 or lower, but we are still unwilling to build too large of positions above .9500 until we see a washout in equities. Look at the DJIA chart attached. A large head and shoulders looms. We are positioning for at least one material retracement in risk currencies, equities and commodities before year end to set up more positioning.

    For the longer term, we have taken some AUDJPY at levels below .7900. We are of the view that the AUDJPY opportunities are in further strengthening of AUD against JPY and that JPY current strength is now limited. Once this is released, AUDJPY will be well supported. I need to remind you that not only do we seek capital appreciation in the currency move, but the interest paid daily on the wide interest rate differential.

    Any movement on AUDJPY at 78.40 or lower is considered a good opportunity to go long and hold for a longer term. While holding long term positions, you can short term trade the pair on swings that combine ATR and big numbers. We could see levels as low as 75.00, so manage risk accordingly. If we are able to buy AUDJPY in the 75.00 to 79.00 range, there is high probability we will see prices hit into the mid 80.00 or higher on AUDJPY next year. With accumulated interest, it’s a nice return for our investors for the one position. We combine this with intraday trades to smooth the volatility. See attachment.

    Remember, the larger funds seek yield in FX trading and positioning. The AUD is the dominant yield currency, at present and will remain so for some time. Risks/Opportunities: pull back in equities, commodities will put pressure on AUD and support JPY and USD.

    It is difficult to offer a short term speculative bias this week with the barrage of event risk that can change our view on the future potential scenarios. The Fed, ECB, BoE, BoJ and RBA hold policy meetings; the US holds mid-term elections and the US reports output and employment data. In the Eurozone there are fiscal developments to watch. Meanwhile, speculation continues to swirl of China moving faster on the yuan, but it remains as rumor at this point. Although the dollar has stayed weak heading into the FOMC meeting, undermined by expectations that the Fed is set to resume quantitative easing, dollar bears should consider the risks. In particular, the temptation to take profit on dollar shorts are rising as year-end nears. However, given the disinflationary pressures in the US, the Fed is anticipated to maintain an open-ended commitment on QE. For as long as markets expect asset purchases to continue, and until inflation returns to a sustainable uptrend, the dollar will remain under pressure. But given the recent strength of non-price-related US data, our core view remains that dollar weakness looks overdone at current levels. Further weakness into year-end will prove temporary.

    Funds have started to take some profits on Fed QE-related trades, but the dollar has stayed weak as central banks actively diversified in October large reserves accumulated in Q3. To keep the dollar weak the Fed needs to meet market expectations of renewed US Treasury purchases on the order of $500-600 bn initially. For the ECB, though October Eurozone CPI came in at 1.9% y/y (vs. cons. 1.8% y/y), continuing risks to growth from a stronger euro and fiscal austerity will keep hawks in check. The BoJ has brought forward its next meeting to respond to the Fed. Even if another increase in purchases of JGBs is announced, USDJPY will stay heavy unless the MoF instructs the BoJ to intervene, as it did in September. Investors should not discount the risk of Tokyo buying USDJPY around 80 given the BoJ's timidity on monetary policy. We believe the downside for USDJPY is limited and supports our AUDJPY trades.

    We expect no change in policy from the BoE, but dovish MPC member Posen is already voting for renewed Gilt purchases. As fiscal austerity bites - UK Q3 data was not affected by the fiscal squeeze that starts after October's spending review - the risk remains that sterling will weaken sharply, but has been challenged by the markets view that further QE is not necessary at this time which has pushed GBP sharply higher. Nordic central banks have turned less hawkish, but we remain bearish on both EURSEK and EURNOK over the medium term as rate differentials remain wide. In the short term, though, we recognize that Nordic currency bulls are exposed to more profit taking ahead of year-end.

    Please review the attached DJIA monthly chart. We are at a dangerous tipping point in the 11300 area. If the current range begins to break down, look for a healthy correction and wait for the point of maximum pain, the time when everyone thinks we're going lower, when the market cries for help... buy AUD's, it still has interest rate support and a good economy.

    We hope to have another update next week after the events have been digested by the market and we have an opportunity to see what price changes occur.


    Attached Files:

  2. georgeta

    georgeta Sergeant

    May 25, 2010
    Likes Received:
    Our savings

    Hello G2!
    Your posts are incredible. I cannot necessarily trade that because of my limitted founds but I can surrely develop a strategy for my bank saving account.
    Nevertheless, I feel reluctant in wireing all my money to some broker in order to control the currency my money is kept.
    Does anybody know a reliable broker or bank that I can trust with all my savings?
    Thank you!

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