A Major Test Awaits the Australian Dollar In 2014 As 2013 Delivered New Correlations

(This is an excerpt from an article I originally published on Seeking Alpha on December 23, 2013. Click here to read the entire piece.)

The Australian dollar (FXA) has finally retested the “W-bottom” from August of this year. So far the test seems successful as the Australian dollar has sharply bounced off the lows over the past three days.


Stevens helps to drive the Australian dollar downward
Stevens helps to drive the Australian dollar downward

Source: FreeStockCharts.com

One of the more notable features of AUD/USD is how well it has responded to the jawboning of Governor Glenn Stevens. His active verbal intervention into the currency reached a climax when on December 12th he fixated the market’s attention on a downside target of 0.85 for the Australian dollar versus the U.S. dollar:

{snip}


Expectations for a rate cut take a tumble
Expectations for a rate cut take a tumble

Source: RBA Rate Tracker

Interestingly, the accelerating weakness in the Australian dollar did not help the Australian stock market this time around like it seemed to do earlier in the year. {snip}


The Australian stock market seems to have finally ended a 6-week skid
The Australian stock market seems to have finally ended a 6-week skid

Source: ASX

{snip}

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In 2013, the Australian dollar's fate has been closely tied to that of the U.S. 10-year Treasury bond yield.
In 2013, the Australian dollar’s fate has been closely tied to that of the U.S. 10-year Treasury bond yield.

It seems that if Stevens really wants to drive the Australian dollar closer to his 0.85 target, he WILL need to further lower rates. If the Australian dollar remains so closely bound to the 10-year bond yield, even creative jawboning may not be enough.

Early this year I was still in the habit of correlating the Australian dollar (FXA) to the S&P 500 (SPY) and using the Australian dollar as an early indicator of direction for the index. That correlation completely broke down once the Reserve Bank of Australia (RBA) cut rates on May 7th from 3.0% to 2.75%. {snip}

So, for now at least, it seems clear that the proper correlation is between the Australian dollar and U.S. bond yields and NOT the U.S. stock market. This relationship should be a key metric to watch for 2014.

{snip}


The S&P 500 has risen far above the fray this year
The S&P 500 has risen far above the fray this year

Source: FreeStockCharts.com

{snip}

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on December 23, 2013. Click here to read the entire piece.)

Full disclosure: net long Australian dollar, long EEM calls and puts, long GLD, long SSO put and call options, long SPHB and SPLV, long TBT

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