Is A New Storm Finally Brewing for the Australian Dollar? - ONE-TWENTY TWO: Trading Financial Markets

(This is an excerpt from an article I originally published on Seeking Alpha on August 24, 2015. Click here to read the entire piece.)

“But lest there be any uncertainty about this, let me be clear, again, that the exchange rate remains high by historical standards…we think that investors are underestimating the likelihood of a significant fall in the Australian dollar at some point.” – Glenn Stevens, Governor of the Reserve Bank of Australia at The Econometric Society Australasian Meeting and the Australian Conference of Economists in Hobart, Australia, July 3, 2014.

When Glenn Stevens issued this warning last year, the Australian dollar (FXA) was trading around 0.935 versus the U.S. dollar. It is now trading around 0.726 for a 22% decline in less than 14 months. Sometimes it really does pay to heed the words of central bankers. If only I had stuck to the short course all the way down.

How much further can the Australian dollar (FXA) fall?

Source: FreeStockCharts.com

The question before traders now is whether this long, drawn out decline is actually the kind of significant fall Stevens had in mind. {snip}

This question is important because currencies across emerging markets have taken sharp tumbles in the wake of the devaluation of the Chinese yuan. Many of these currencies are not actively on the radar of traders. {snip} Here is the new list of vulnerable currencies:

Morgan Stanley's troubled ten currencies ranked in descending order of performance versus the U.S. dollar as of August 16, 2015 — Morgan Stanley’s troubled ten currencies ranked in descending order of performance versus the U.S. dollar as of August 16, 2015

Source: Bloomberg

The Australian dollar is notably absent despite its tight linkage to the fortunes of China.

{snip}

The odds for a rate cut finally woke up a bit to start the week. It still looks a small response in light of the massive drops in equity prices from China to Australia and across the globe.

Source: ASX RBA Rate Indicator

Even speculators have not increased net bearish bets over the last month or so.

Speculators remain content with current net bearish positions on the Australian dollar

Source: Oanda’s CFTC’s Commitments of Traders

{snip}

The euro's near relentless march against the Australian dollar has practically gone parabolic in recent days? Is this a climax in the making or the beginnings of something even more massive? — The euro’s near relentless march against the Australian dollar has practically gone parabolic in recent days? Is this a climax in the making or the beginnings of something even more massive?

Source: FreeStockCharts.com

So, perhaps market participants have concluded that the Australian dollar is finally pricing in the current turmoil (relative to the U.S. dollar). Or perhaps this is some kind of calm before the storm. In response to my increasing wariness, I have completely focused on opportunities to short the Australian dollar now (still with a short-term focus). If the market finally heeds Stevens’s admonition in one fell swoop, I want to make sure I am positioned in the correct direction.

Be careful out there!

Full disclosure: no positions

(This is an excerpt from an article I originally published on Seeking Alpha on August 24, 2015. Click here to read the entire piece.)

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