ONE-TWENTY TWO - A collection of personal articles on financial markets including analysis you can use
May
1

A Confident Story Cuts Through the RBA’s Monetary Conundrum And Drives the Australian Dollar Lower

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on May 1, 2015. Click here to read the entire piece.)

While the U.S. dollar (UUP) was experiencing fresh bout of weakness, the Australian dollar (FXA) was surprisingly even weaker. Although I explained in an earlier piece that the Australian dollar was over-extended against several currencies, I did not expect anything more than a mild pullback. After all, punching through the 0.80 level on AUD/USD looked like a display of strength as part of a near 2-week run-up since a surprisingly strong jobs report.


The U.S. dollar index continues its breakdown from the previous primary uptrend...

The U.S. dollar index continues its breakdown from the previous primary uptrend…

...yet, the Australian dollar has suddenly become even weaker as it pulls back from resistance

…yet, the Australian dollar has suddenly become even weaker as it pulls back from resistance


Source: FreeStockCharts.com

Somehow, I missed until the time of writing (the evening of April 30th) that a single article in the Sydney Morning Herald was credited for driving weakness back into the Australian dollar. {snip}


McKenna referred to “Reserve Bank to cut interest rates in May in face of weak economy.” The title alone looks definitive and predictive. I am guessing many traders freshly selling the Australian dollar barely looked past the headlines. If they had, they would have found at least one VERY odd feature of this article: not only did the author fail to name a source for his confidence, but also he chose not to use that ubiquitous yet anonymous generator of insider information “a source who did not want to be named.” {snip} Lacking references or a source, the author instead constructs credibility from the certainty of his language; a technique I find even less convicing that a conveniently planted whisper or two from the RBA.

The author creates credibility by making exceptionally definitive statements that could only come from someone with direct contact with a member of the Reserve Bank of Australia (RBA) or related insider. {snip}

While I can quibble about the author’s approach and lack of sourcing, I have an even bigger problem with the premise of cause and effect. The author believes from his RBA-informed source that rates must be cut to prevent the Australian dollar from climbing even higher. After the RBA cut rates to 2.25% on February 2nd, the Australian dollar plunged to new multi-year lows. it bounced right back the following day. The RBA failed to cut rates in March, and the Australian dollar proceeded to decline to fresh, albeit very marginal, multi-year lows. Those same lows were tested twice before the currency launched into a new two-week run-up, triggered by a surprisingly strong employment report. These points are shown in the above chart.

In other words, the last rate cut was ineffective in driving the Australian dollar lower. Why then should the RBA conclude that the next one will do any better? If anything, I contend that the RBA is trapped by a market that is trying to anticipate the END of the rate cycle, not the beginning of a new path downward. {snip}


The market is right back to anticipating an RBA rate cut next week

The market is right back to anticipating an RBA rate cut next week


Source: ASX RBA Rate Indicator

McKenna raised another good point in all this intrigue in a piece he called “Is there another RBA leak that needs investigating?” {snip}

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on May 1, 2015. Click here to read the entire piece.)

Full disclosure: net long the Australian dollar

May
1

Australia’s Q4 2014 Inflation Enough to Erase Momentum for February Rate Cut

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on January 25, 2015. Click here to read the entire piece.)

Perhaps the market was really expecting a much lower inflation reading in Australia.

The Australian Bureau of Statistics reported the Consumer Price Index (CPI) in Australia for the fourth quarter of 2014 at 0.2% after a 0.5% reading in the previous quarter. This was below “expectations” for 0.3%. The CPI for the year came in at 1.7%. While this brings inflation below the Reserve Bank of Australia’s target range of 2 to 3%, the decline in CPI was greatly dominated by the fall of gasoline prices:

{snip}

So, it will be very easy for the Reserve Bank of Australia to look through the impact of oil prices to decide it can continue to wait before dropping interest rates. Notably, the housing component of the CPI was relatively strong for 2014:

{snip}

A delay in a rate cut is exactly what the market concluded as the odds for a rate cut in next week’s meeting on monetary policy plunged from 38% to 16%. This move completely reversed the gains inspired by the surprise rate cut from the Bank of Canada just last week.


Expectations for a February rate cut suddenly plunge

Expectations for a February rate cut suddenly plunge


Source: ASX RBA Rate Indicator

{snip}


30-minute chart shows the immediate show of strength for the Australian dollar after the CPI report

30-minute chart shows the immediate show of strength for the Australian dollar after the CPI report


Source: FreeStockCharts.com

I am skeptical of the market’s conclusion. After all, one central bank after another has pointed to oil as a reason to proactively make a move against disinflationary forces. With iron ore freshly plunging this year, now at a 5 1/2 year low and down about 14% year-to-date already, the RBA has every excuse it needs to begin easing again at its next meeting.

Regardless, I consider this rally another opportunity to fade the Australian dollar. {snip}

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on January 25, 2015. Click here to read the entire piece.)

Full disclosure: net short the Australian dollar

May
1

A Plunge In Business Confidence and Conditions Help Drive the Australian Dollar Ever Lower

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on December 9, 2014. Click here to read the entire piece.)

The DailyFx lists the the National Australia Bank’s (NAB) monthly indices for Business Confidence and Business Conditions as having a low impact on currency markets. As a result, I do not have this report on my radar for analysis or trades. However, “this time was different.” The DailyFx listed “expectations” for Business Conditions as 13 and Business Confidence as 5. The actuals came well under at 5 and 1 respectively. I think the higher expectations were extrapolations from a relatively strong and encouraging October report. The response in overnight currency markets was immediate; the selling in the Australian dollar (FXA) is on-going at the time of writing.


The 15-minute view makes clear the catalyst for the latest breakdown

The 15-minute view makes clear the catalyst for the latest breakdown

The skids are fully greased for the Australian dollar versus the U.S. dollar

The skids are fully greased for the Australian dollar versus the U.S. dollar


Per the strategy I outlined in early November, I trigger shorts (or increase them) on the Australian dollar on confirmed weakness. {snip}


An ominous breakdown from recent highs continues for the Australian dollar versus the Japanese yen

An ominous breakdown from recent highs continues for the Australian dollar versus the Japanese yen


Source of charts: FreeStockCharts.com

{snip}


Business Confidence and COnditions in Australian plunge according to a survey from the National Australia Bank

Business Confidence and COnditions in Australian plunge according to a survey from the National Australia Bank


Source: National Australia Bank

The NAB notes that the trend for business conditions are much better than 12 to 18 months ago. The large spike in conditions in October was “broad based” while November’s plunge was narrowly “concentrated in retail, manufacturing and service industries.” However, there were three items with potentially large implications for the Australian dollar.

{snip}

No surprise that the confidence numbers are highest in construction and in finance/property given Australia’s hot housing markets, especially in Sydney. Ironically, these very same markets are likely making the RBA hesitant to cut rates to new historic lows. All other sectors plunged. Mining was of course the worst performer of all.

Perhaps ironically, forward looking indicators do not (yet?) reflect much of the current doldrums. {snip}

The bottom-line is that the Australian dollar’s weakness has inherited its own momentum now. Traders are now very willing to take the currency lower: no more “stubbornly strong Australian dollar.” The RBA need do little to nothing from now until the February monetary policy decision. I expect the Australian dollar to its low point well ahead of that meeting and then churn into it as market participants await confirmation of a freshly dovish RBA…whether in the form of a rate cut or the promise of imminent cuts.

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on December 9, 2014. Click here to read the entire piece.)

Full disclosure: net short the Australian dollar

May
1

Stern Warnings to Financial Markets

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on October 14, 2014. Click here to read the entire piece.)

{snip}

Guy Debelle, an Assistant Governor of the Reserve Bank of Australia (RBA), delivered a must read speech on pricing and volatility in financial markets. He was about as subtle as a ton of bricks in laying out a panoply of risks that lie ahead for traders and investors in bonds, stocks, and foreign exchange. Debelle spoke of sell-offs, corrections, and market disruptions in terms of “when”, not “if.” {snip}

Similar to the rhetoric we have heard from the world’s major central bankers, Debelle expressed surprise at the persistence of low volatility given all the disruptive events going on in the world:

{snip}

Later in the speech, Debelle implies that there is no rational explanation for this “state of affairs.” {snip}

However, Debelle completely ignores or at least attempts to step aside from the recent history. Seeing is believing for investors. In general, central banks have reacted only in one direction and have tended to show extreme caution and prejudice AGAINST data that suggest that the current course of monetary policy needs any dramatic adjustment. Even when discussing prospects for higher rates, the Bank of England (BoE) and the U.S. Federal Reserve speak of extraordinary gradualism. They speak in reassuring words that the ultimate destination for rates is much lower than what was considered normal not long ago. {snip}

What REALLY raised my eyebrows in this section of the speech was Debelle’s suggestion that we should NOT automatically believe and accept the pronouncements of central banks {snip}

Debelle seriously begs the question of what exactly kind of thinking do we need to do for ourselves? Read between the lines? Read the minds of central bankers? Quibble with their economic forecasts? Perhaps even bet against the printing press? I think not. I have frequently observed that the market is often hyper-sensitive to the words of central bankers, but cooler heads almost always prevail. Debelle’s statement made me wonder whether I should also be reading between the lines of this very speech. Hmmm…

Anyway, things really get interesting, even disturbing at times, when Debelle discusses the possibilities for market disruptions. He first takes aim at institutions who think they are making easy money chasing yield by selling volatility protection at low premiums {snip}


Financial Market Volatility

Financial Market Volatility


{snip}


Fear still knows no bound -next up 2012 highs?!?!

Revenge of ProShares Ultra VIX Short-Term Futures (UVXY)

Revenge of ProShares Ultra VIX Short-Term Futures (UVXY)


Source for charts: FreeStockCharts.com

{snip}

The disruptive impact of the sell-off will be driven by investors who are buying assets with “…the presumption of a level of liquidity which is not there.” If that is not a stern warning of a major crash-like event, I do not know what is:

{snip}


Despite recent strength, the U.S. dollar remains locked in a notable secular decline

Despite recent strength, the U.S. dollar remains locked in a notable secular decline


Source: St. Louis Federal Reserve

{snip}

This is definitely one area of analysis where market participants are thinking for themselves and essentially ignoring the constant reminders from the RBA that the currency is extremely over-valued. {snip}

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on October 14, 2014. Click here to read the entire piece.)

Full disclosure: long the Australian dollar, short the euro, net long the U.S. dollar

May
1

The Australian Dollar Stands Between Here And A Larger Correction

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on October 13, 2014. Click here to read the entire piece.)

In “The dollar keeps falling: What’s happening to our economy?” Gareth Hutchens of the Sydney Morning Herald tries to explain to the everyday reader how the Australian dollar’s (FXA) twists and turns relate to Australia’s economic prospects. {snip}

Anyway, Hutchens goes on to explain some of the mechanics of how the currency’s moves ripple through the Australian economy. It is is difficult to come to a final conclusion because Hutchens identifies two distinctly counter-acting forces: a drop in Australian earnings repatriated into the country versus more competitive pricing of Australian exports which could increase export volumes. {snip}

One thing seems clear if trading on the S&P 500 (SPY) is any indication: the Australian dollar is sympathetic with, and perhaps even linked to, market sentiment in the U.S. The Australian dollar has stood between “here” and a market correction twice already this year, and it could very well signal the difference this time around as well.

In particular, the Australian dollar combined with the Japanese yen (FXY) has repeatedly come through as a key indicator for navigating a period of increased volatility for the S&P 500 (SPY). I discussed the prospects for this signaling at the end of last year.

{snip}


The S&P 500 slams into is most critical test since the 200DMA last cracked in Nov, 2012

The S&P 500 slams into is most critical test since the 200DMA last cracked in Nov, 2012

AUD/JPY failed to confirm the last all-time high on the S&P 500 and for two trading weeks failed to confirm the on-going selling on the S&P 500

AUD/JPY failed to confirm the last all-time high on the S&P 500 and for two trading weeks failed to confirm the on-going selling on the S&P 500


What is more clear from hindsight is that AUD/JPY also failed to confirm the last all-time high on the S&P 500. {snip}


A bottom-forming bounce my finally be underway

A bottom-forming bounce my finally be underway


Meanwhile, the potential bottom I identified in the Australian dollar versus the U.S. dollar is still holding after almost two weeks. {snip}


AUD/USD has bounced wildly off the 2014 low in October

AUD/USD has bounced wildly off the 2014 low in October


{snip}

This 100% long position is not easy for me since I am inclined to remain bearish on the currency. For now, short-term price action rules. Moreover, recall that I used Australia’s Bureau of Resources and Energy Economics (BREE) forecasts to estimate that the Australian dollar would survive its 2014 low against the U.S. dollar. So far, so good.

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on October 13, 2014. Click here to read the entire piece.)

Full disclosure: net long the Australian dollar

May
1

The Australian Dollar Firms As Another Fed Over-Reaction Helps to Pause Currency Trends

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on October 9, 2014. Click here to read the entire piece.)

Not even another poor jobs report – unemployment rate up from 6.0% to 6.1% and a loss of 29,700 employed persons – could keep the Australian dollar (FXA) down. During the Asian currency trading session the Australian dollar took a quick tumble and made almost as quick a recovery, resuming its momentum for the week.

The Reserve Bank of Australia (RBA) may soon wish it had taken the ripe opportunity this week to tip its currency over the edge. Instead, the statement on monetary policy earlier this week made no such attempt. After the market’s relieved reaction to the release of the minutes from the Federal Reserve’s September policy meeting, the Australian dollar darted ahead to a new high for the week that seems to have put polish on a bottom (for now).


A strong week so far for FXA as its bounce from new 2014 lows continues

A strong week so far for FXA as its bounce from new 2014 lows continues


The Fed minutes did not contain any fundamental surprises, but it was notable in the various references to the U.S. dollar’s (UUP) exchange rate. The speed and sharpness of the U.S. dollar index’s rally since July has been remarkable, so perhaps it is not surprising that even the Fed would take an opportunity to take note along with financial markets.


The U.S. dollar index's upward momentum finally hits a speed bump this week

The U.S. dollar index’s upward momentum finally hits a speed bump this week


{snip}

While the Fed does not say the dollar’s rise reduces the need or urgency to raise rates, the market’s reaction to the minutes seems to imply that interpretation. {snip}

Lost in the noise over the U.S. dollar is the relative trading between the Australian dollar and the Japanese yen (FXY). Just like the AUD/USD currency pair, AUD/JPY powered through an initial hiccup to the poor jobs report. The recent resilience in AUD/JPY helped me confirm the (short-term?) buying opportunity when the S&P 500 dropped into oversold conditions.


The Australian dollar versus the Japanese yen continues to hold support at the 200DMA through the accelerated selling of the oversold periods

The Australian dollar versus the Japanese yen continues to hold support at the 200DMA through the accelerated selling of the oversold periods


{snip}

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on October 9, 2014. Click here to read the entire piece.)

Full disclosure: net long Australian dollar, net long the U.S. dollar

May
1

An Extended Forecast for A Stronger Australian Dollar

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on September 28, 2014. Click here to read the entire piece.)

Australia’s Bureau of Resources and Energy Economics (BREE) recently released its September, 2014 quarterly report on Australia’s resources and energy sectors and analysis of key commodity markets. Each report includes forecasts for the Australian dollar (FXA). The September report includes an extended forecast. This year, the BREE has projected a much stronger Australian dollar than it did last year.


The BREE hikes its expectations for the Australian dollar exchange rate

The BREE hikes its expectations for the Australian dollar exchange rate


Source: Australia’s Bureau of Resources and Energy Economics (BREE)

{snip}


FXA has experienced wide swings over the year: it is now down for the year and headed to a retest  of the year's low

FXA has experienced wide swings over the year: it is now down for the year and headed to a retest of the year’s low


Source: FreeStockCharts.com

{snip}

The forecast of an average exchange rate of 0.92 means that the Australian dollar will experience a relatively strong rally in coming months and could of course trade back to the top of the year’s range. The BREE’s forecast for a slight annual decline in the average exchange rate suggest that the BREE overall expects the Australian dollar to continue exhibiting rangebound trading with a slight downward bias.

{snip}

The stubborn resilience of the Australian dollar in the year following that report has clearly convinced the BREE to hike its expectations of the exchange rate. {snip}

Deferring to the insights of the BREE means that this increase in expectations for the Australian dollar has important trading implications. First and foremost, the Australian dollar seems likely to survive a coming retest of 2014 lows. {snip}

Time will soon tell…

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on September 28, 2014. Click here to read the entire piece.)

Full disclosure: short Australian dollar

May
1

A Deceptively Strong August Jobs Report for Australia

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on September 11, 2014. Click here to read the entire piece.)

The August employment report from the Australian Bureau of Statistics (ABS) delivered a tremendous surge in jobs. The additional 121,000 people employed in August far exceeded the “consensus forecast” of 15,000. Even this forecast was quite optimistic given 1991 was the last year Australian employment increased from July to August according to the ABS in its commentary. At 6.1% the unemployment rate is now a bit off 12-year highs. The numbers are so strong that the ABS noted in its commentary: “Because of the unusually strong increase in employment estimates, the ABS has extensively checked the data.” These checks were also necessary because the ABS introduced several changes to its survey and statistical procedures in the August report.

A quick look under the hood reveals reasons to be disappointed with the jobs report:

  1. 88% of the job creation came from part-time jobs.
  2. Since most of these part-timers were likely looking for full-time employment, the under-employment rate shot up from 7.8% to 8.7%.
  3. Labor force under-utilization also soared from 13.6% to 14.6%.

{snip}


Despite the surge after the jobs report, the Australian dollar remains deep in breakdown territory

Despite the surge after the jobs report, the Australian dollar remains deep in breakdown territory


Source: FreeStockCharts.com

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on September 11, 2014. Click here to read the entire piece.)

Full disclosure: short AUD/USD

May
1

Bad Signs: The Australian Dollar Trips As Iron Ore Stumbles Over $100

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on May 20, 2014. Click here to read the entire piece.)

The miners of iron ore spent the last few years ramping up production capacity, and now they are ramping up production. The price of iron ore has steadily fallen in 2014 as inventories in China have steadily risen. Bloomberg quoted figures from Shanghai Steelhome Information Technology Co. indicating that China is now sitting on a record 112.55M metric tons of iron ore. Iron ore producers have thrived during this period as volume has made up for price on top of very low production costs. Rio Tinto (RIO) starts losing money at a mere $44/metric ton; BHP Billiton Limited (BHP) at $56/tonne (data from “Miners in spotlight as iron ore drops below $US100 per metric tonne). {snip}


Rio Tinto has easily remained aloft even as iron prices have fallen this year

Rio Tinto has easily remained aloft even as iron prices have fallen this year


{snip}


Upward momentum seems to be ending for the Australian dollar against the U.S. Dollar

Upward momentum seems to be ending for the Australian dollar against the U.S. Dollar


{snip}


The beginning of a breakdown for the Australian dollar against the Japanese yen

The beginning of a breakdown for the Australian dollar against the Japanese yen


The Australian dollar is important in this context as a barometer for the market’s general sentiment toward economic conditions in China. {snip}

With stock market volatility trading at the bottom of its range, conditions are ripe for a sudden pullback. Since the beginning of 2013, volatility has tended to spend very little time at current levels. In other words, there is little tolerance for something going wrong – a continued drop in iron ore prices and a sliding Australia represent “something going wrong” in the current context.


Volatility is trading at levels that typically do not last long

Volatility is trading at levels that typically do not last long


Source for charts: FreeStockCharts.com

I believe the following commentary from the opening remarks of the Bank of England’s Governor Mark Carney in last week’s Inflation Report should prove prescient:

“While risks around the euro area are now two-sided around a modest growth rate, there are downside risks from the consequences of the rapid growth of shadow banking in China. More broadly the MPC is alert to vulnerabilities from a reassessment of risk in financial markets, perhaps prompted by geopolitical developments or uncertainties about the normalisation of monetary policy. Despite a more complex global environment, implied volatilities in many markets are well below their long-term averages.

Heading back to normal will likely be accompanied by more normal, that is higher, levels of volatility.”

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on May 20, 2014. Click here to read the entire piece.)

Full disclosure: net short the Australian dollar

May
1

Stevens Passes On Jawboning the Australian Dollar and Sticks to A Familiar Script

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on March 27, 2014. Click here to read the entire piece.)

The Australian dollar (FXA) has been incredibly resilient in recent weeks. Weak economic data from China and concerns about excessive debt in the Chinese economy have barely dented the recent momentum. As of the time of this writing, the Australian dollar is printing a potentially important breakout above its 200-day moving average (DMA).


The Australian dollar breaks out as part of a 2-month recovery from multi-year lows against the U.S. dollar

The Australian dollar breaks out as part of a 2-month recovery from multi-year lows against the U.S. dollar


Source: FreeStockCharts.com

As the chart above shows it was only three months ago when Glenn Stevens, the governor of the Reserve Bank of Australia (RBA), suggested that 0.85 is a fair target for the Australian dollar versus the U.S. dollar. With this context, I half-expected Stevens to treat his Wednesday speech to the 17th Annual Credit Suisse Asian Investment Conference as another opportunity to tease the market into doing the RBA’s bidding. Instead, Stevens seemed to take great pains to avoid jawboning as he sang the praises of the Australian economy. At one point, Stevens even suggested that he is not (no longer?) interested in trying to tweak the exchange rate as a tool for economic growth:

“Strong long-run growth won’t be achieved in any country simply by manipulating interest rates (or, for that matter, exchange rates).”

There were only two moments when Stevens even bothered to question the market’s pricing mechanism for exchange rates. {snip}….

Be careful out there!

Full disclosure: net short the Australian dollar

(This is an excerpt from an article I originally published on Seeking Alpha on March 27, 2014. Click here to read the entire piece.)

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