Category Archives: AUD

Not Reaching for the Falling Knife

The news was bang on consensus. The EFSF, bank capital and the Greek haircut were all in line with what everyone was expecting yet markets have reacted as if hit by a bolt of lightening.

To some extent, I get it. I was evidently one among many who thought European leaders wouldn’t be able to pull it off – the boat was tilted far too heavy to that side and the reckoning is here.

That’s not to say there aren’t risks. Nothing has been finalized and the devil is always in the details.

I’m of the firm belief that economic growth will continue to disappoint. Even today’s GDP report showed the rise in consumer spending tilted towards healthcare and utilities at the expense of the savings rate, suggesting the consumer is tapped out for everything but the essentials.

The Bank of Canada took a dovish approach this week and the ECB and RBA may both cut in the week ahead. There is a tremendous opportunity to short CAD, EUR and AUD today and those would be my three favourite trades. But there is no rush, I have little doubt that selling EUR/USD at the tail end of US trading today would yield an easy 70 pips, but let’s see if we can set-up for something more.

The dollar was the worst performer, followed by the yen. The Swiss franc led, followed by the euro.

Of all the strange things today, the CHF rally is the strangest. How on earth is CHF rallying in all this? The only answer is that the SNB sold some of their euros into the rally.

The first chart to check out is AUD/USD. If anything is overbought, it’s this. The resistance at 1.0764 is a stop that makes for a good short-term sell.

 

Buying USD/CAD longs is the trade I’m looking for right now but if I had a gun to my head, I would be selling because 0.9800 looks like it’s coming.

Finally, I can’t say that I’m crazy about the euro. The ECB is probably going to cut rates tomorrow but with the momentum the way it is, any short for more than a 70 pip move is too risky.

 

 

 

 

 

 

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Trade Review: AUD/CAD (+311 pips)

Entered AUD/CAD long at 1.0248 on 12 Aug added on Aug 15 at 1.0295. Exited 23 Aug (+147 pips) at 1.0395 and 30 Aug (+164 pips) at 1.0459. Result: +311 pips.


Entered with a stop at 1.01 and a target of 1.05. Greatest open loss: 80 pips Greatest open gain: 340 pips.

Technicals were the primary driver for a long AUD/CAD entered on Aug. 12. The weekly chart caught my attention due to the dragonfly reversal. I also noted how rate hikes were overpriced in Canada.

My full reasoning was here

I noted that my next best idea was short CHF/JPY and that would have also been an excellent trade that was never in a negative position and gained as much as 600 pips in the same time frame.

After the break of 1.03 on Aug 14, we waited for a pullback and doubled our long position at 1.0295.

On Aug. 17 we noted there was no reason to take profits but the pair went on to post its worst one-day performance of the trade, falling 100 pips.

Despite this, we remained confident and felt a bounce to 1.03 (at least) was about to happen.

We went back to the weekly chart on Friday and it continued to look lucrative.

On Aug 22 we were rewarded with a surge to 1.04. We accurately saw this as a great time to take some profits. This allowed us to hang onto the second part of the trade for an additional 60 pips (above where we sold the first unit).

What I’ve learned: I may have rushed into buying the second unit after the break of 1.03. As we saw, there was a deeper pullback than I anticipated and this was the only time I was nervous about the trade. I targeted 1.05 so I may have exited the trade too soon. The weekly chart looks like it will get to at least 1.0550 but I’m nitpicking at a great trade.

 

What I’m happy about: Lots. I saw a lucrative pattern on a weekly chart and hung onto the trade for close to three weeks. The thing I’m most proud of is the way I sold the first part of the trade at the perfect time, nearly nailing the top on the bounce over 1.04 and locking in a nice profit that allowed me to easily wait out the next run toward the ultimate target. Opening a trade with two units or adding a second unit early on is my favourite manner of trading because it gives me this flexibility. I’m also pretty happy about noting that short CHF/JPY was my second favourite idea.

 

 

 

 

 

 

 

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Sold AUD/CAD at 1.0459 (+164 pips)

We’ve wrapped up a great AUD/CAD trade by taking profits on the second part at 1.0459 for a gain of 164 pips. We sold the first part on Aug. 23 for a gain of 147 pips. The combined net gain of the trade was 311 pips. For those with interest earning accounts, this trade would have also provided positive carry for 18 days.

This was our only trade of the month and we loved every minute of it. We avoided the volatility elsewhere and were holding a profitable position nearly every day.

The trade was based on the weekly chart that we posted here and at chart.ly. We pointed out the dragonfly reversal and a noted that it pointed to a re-test of 1.05.

AUD/CAD reached as high as 1.0480 yesterday and has been up for four consecutive days. We may see another 40-60 pips of immediate upside in this trade but we’re now growing more bearish about the global economy and are looking to put on some trades reflecting that. We expect to see some sort of spike higher in risk trades followed by a reversal in the next day our two. Follow @FX_Button for all the trades.

I want to let this trade sink in and I will have a full review with charts tomorrow.

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Adding to AUD/CAD Ahead of RBA Minutes

We like the Australian dollar ahead of the RBA minutes for a short-term trade and since AUD/CAD has acted as we expected, we’re going to add to our longs here at 1.0295.

 

We bought AUD/CAD on Friday at 1.0248. Read about it here:

 

Our catalyst for buying now is today’s release of the Aug. 2 Reserve Bank of Australia meeting minutes at 0130 GMT . If we remember back to the previous meeting minutes, the RBA came out more hawkish than expected and it led to a 500 pip boost in AUD/USD and 400 pip boost in AUD/CAD in the next two weeks. We expect to see something similar, albeit not as dramatic.

 

We like the trade because we believe there was a lively debate about hiking rates at the meeting. The discussion took place one week after Q2 CPI hit 3.6% y/y (compared to 3.3% in Q1). Officials in the statement emphasized that inflation had peaked but we don’t believe this was a universal sentiment. We also believe upbeat talk about the domestic economy could give AUD a boost.

 

The downside risks relate to offshore activity. The RBA was incredibly smart/lucky not to hike rates ahead of the wave of risk aversion that hit markets just hours after the decision. They noted external risks and, of course, some of those have come to pass. The risk to our trade is that the market will ignore upbeat comments on inflation and growth and recognize that some of the downside scenarios related to offshore developments have come to pass. Any discussion about cutting rates would cripple our trade but we see it as a less than 1% chance.

 

On balance, even if the main downside scenario comes to pass, we don’t see a large scope for AUD to fall.

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Bought AUD/CAD at 1.0248

Technicals were the primary driver for a long AUD/CAD trade I entered Friday. I announced the trade on twitter via FX_Button.

 

Every Friday, shortly before the market close, I take a look at the weekly charts and see if anything jumps out. This turnaround, along with probably reversals in CHF crosses caught my attention. The reversals in CHF look convincing but I’m reluctant to fight the huge upward trend in CHF.

 

Let’s have a look at AUD/CAD weekly chart.

 

AUDCAD Weekly Aug 12
AUD/CAD Weekly One-year

The dragonfly doji reversal pattern is what jumped out. AUD also looks strong against USD but with this trade I minimize the difficult risk on/risk off trade.

 

Breaking down the fundamentals also creates a convincing trade. Despite the furor about the soft AUD jobs data and potential rates cuts this year, we are not yet convinced. The RBA took a small step toward HIKING rates at the last meeting, while warning about potential downside risks off shore. It appears as though some of those risks are coming to pass (esp. in US and Europe) but that, alone, will not be enough for the RBA to cut rates. At the same time, Chinese and Japanese data has been stronger than expected.

 

The same risks apply to Canada. What leaves CAD more vulnerable is that the market is pricing in rate hikes in Canada in the coming six months. With US growth faltering, we highly doubt those hikes are still on the table. If fact, we see the BOC as more likely to cut rates that the RBA.

 

With this trade, we will look to add around 1.03 for an initial target of 1.05. So far the early Asia-Pac trade has been good to us after a curious rally in CAD in the final 30 minutes of trading on Friday but us behind 35 pips almost immediately. Those losses have been recovered with the pair gaining 80 pips so far this week.

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Stocks Have Bottomed But AUD Hasn’t

The S&P 500 will continue to rebound after the post-FOMC rally but forex market risk trades like AUD/USD will underperform as the market adjusts to the zero-growth reality in the United States.

The FOMC decision set off a wild round of trading. In less than two hours, the S&P 500 traded in a 117 point range. Eventually stocks closed at the daily highs and pulled risk trades along for the ride.

Here are some highlights of the FOMC decision:

  • The Fed committed to keeping rates low until “at least through mid-2013”
  • Three FOMC members dissented to ‘mid-2013’ saying they preferred to keep the vague commitment to low rates “for an extended period.”
  • The Fed said growth so far this year “has been considerably slower” than expected. They noted a deterioration in the labor market. There is no longer any mention of “the recovery”. They also noted that temporary factors like the tragedy in Japan account for only some of the recent weakness.
  • Previously, the Fed said it expected the recovery “to pick up” in the coming quarters. It now expects “a somewhat slower” place of recovery. They compounded the downgrade by saying that downside risks have increased.
  • The outlook for inflation was downgraded.
  • The Committee discussed the range of policy tools available to promote a stronger economic recovery… and “is prepared to employ these tools”

The final point was key because it helps explain the rebound in risk assets. It sounds like the Fed has several ideas on how to boost the economy, if need be. The thinking is that after Jackson Hall something will be implemented. This was the course of action with QE2.

To us, a larger factor was the relative value of stocks compared to bonds. After the FOMC, ten-year Treasury yields touched a record low of 2.03%. Dividends on 22 of the 30 stocks in the Dow yield more than 10 years and the average yield is 3.26%. The market tried to bully the Fed into QE3. The Fed didn’t bite (yet at least) so the market took a second look at where it could stash its money and decided risk assets were still a good bet.

That’s the takeaway for the immediate term, but what about the next 4-6 months?

We believe the market is in the process of pricing in a long period of near-zero growth in the US — something akin to the Lost Decade in Japan.

The US government is tapped out and spending cuts will continue no matter the economic state. This will be a headwind to growth, cutting about 0.5% per year from GDP.

The Fed is tapped out as well. There is nothing the Fed can do to lending rates that will stimulate growth. Borrowing rates are next-to-nil and we they don’t have a mandate or the power to get the economy moving.

This scenario may sound negative for stocks but it’s not as bad as it sounds. 1) Companies with solid (A+) ratings can borrow at extremely low  rates. 2) The worldwide economy is growing, booming in some places. Multinationals are making a larger and larger portion of their revenues abroad.

In the forex market, this doesn’t translate into the ‘risk trade’. Slower US growth will hurt commodities more than corporate profits so commodity currencies will underperform. CAD is especially vulnerable because a) rate hikes are priced in. b) Canada is highly integrated with the US. c) raw commodity exports are a large part of the Canadian economy. d) Canadian house prices are overvalued.

The first thing to break down will be the carry trade. This has already begun and will continue as AUD/USD falls to 90-cents. The Canadian dollar will be the next to decline. Traders will increasingly look to emerging market currencies.

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July Trade Review: AUD/USD (+92 pips)

Entered AUD/USD at 1.0950 on 26 July. Exited July 26 at 1.1042. Result: +92 pips

AUDUSD trade analysis July 26
AUD/USD 30 minute, July 26

Entered with no stop. Greatest open loss: 15 pips Greatest open gain: 110 pips

Sometimes a trade that is bought minutes or hours ahead of data looks whimsical but when it’s good, it’s often because it was set-up long beforehand.

I entered this trade because I became bullish Australian dollar after the RBA minutes on July 18 (my analysis here).

I became further convinced AUD/USD was going higher due to the breakout of the triple-top at 1.0789 on July 21.

AUDUSD tweet 21 Jul
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I was waiting for a pullback but I knew that I wanted to be long into the decision. At the same time, it was risky to be holding USD positions because of debt ceiling talks and volatility in markets so I minimized those risks by buying hours before the decision on the bottom end of the recent range.

“We’re sure that the record of 1.1012 will fall,” we wrote.

What I should have known better: If I would have thought harder and prepared better, I would have realized what the break above resistance at 1.0789 was forecasting and been ready to buy on the pullback to 1.0800. I also left some pips on the table by covering perhaps too quickly. Eco data is always somewhat unpredictable, so I should have used a stop, even though I was watching the decision.

What I’m happy about: The fundamentals and technicals aligned and I jumped at the opportunity. What’s better than that?

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Buy AUD Ahead of RBA Decision

Our best trades over the past month have been on Australian fundamental data so we’re going to continue to stick with what works by buying AUD/USD ahead of the RBA decision at 1.0970. That’s 110 pips below the record high and we’re expecting AUD to blow through that level by the end of the week.

I published my analysis of the RBA at ashraflaidi.com earlier today. http://tinyurl.com/3jhc7du

Let me sum up my thinking briefly:

  1. AUD/USD has broken out technically, hitting a fresh record high of 1.1080 last week.
  2. We have a pullback from the high that’s giving us a buying opportunity.
  3. We’re trading with the trend.
  4. Fundamentally, we read the RBA minutes as much more hawkish than some others and we’re going to trust our experience and knowledge.
  5. CPI was high last week and inflation is above target.
  6. Terry McCrann is a good RBA watcher and he’s overdue for a correct call.
  7. Our downside is limited. We have a 60 pip stop at 1.0910 and don’t expect it to get hit even if we’re dead wrong.
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July Trade Review: AUD/USD (+108 pips)

Entered AUD/USA short at 1.0735 on July 4. Exited July 18 at 1.0627. Result: +108 pips

AUD/USD daily July 2011
AUD/USD daily July 2011

Entered with stop at 1.0800 (65 pips). Greatest open loss: 54 pips Greatest open gain: 210 pips

I entered this trade ahead of the RBA decision on July 4. I expected a dovish statement and explained why in a post RBA Will Remain on the Sidelines, AUD Vulnerable  “The Australian dollar is likely to fall if policymakers do not take strong incremental steps toward future rate hikes,” I wrote. “The market is still hanging on to the idea that the RBA could hike in August but we see it as a long shot.”

I wanted to be short USD on July 18 so I exited the trade. Then the RBA minutes were more hawkish than I expected. I wrote this before exiting the trade RBA Minutes Disappoint Doves “What sounded like worries about employment and growth in the statement, read more like a simple adjusting of time frames in the minutes,” I wrote, noting that a high CPI reading late in July could put rate hikes back on the table.” Later in the month I used this perspective and I made money on AUD/USD longs.

What I should have known better: Not much. I could have booked a nicer profit on July 11 but I wasn’t prepared (see my trades in NZD/JPY and NZD/CHF for more).

What I’m happy about: This is what I do best – trades based mostly on fundamentals with some technical underpinnings. I entered the trade ahead of a fundamental event and left the trade as soon as the fundamentals changed. I also didn’t get shaken out by the nearly 300 pip rally on July 11-12.

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USD/JPY Set for a Breakdown, Be Long AUD/USD

It’s getting more difficult to avoid insults and hyperbole when describing the debt ceiling imbroglio. Surely you haven’t stumbled here looking for a recap of the day’s news so I’ll spare you the exercise save for a few thoughts. 1) On Tuesday it actually appeared that debt ceiling talks were moving backwards. 2) the real deadline is around Aug. 15. 3) We estimate the likelihood of a downgrade from S&P, Moody’s or Fitch at 70%. 4) the US looks increasingly to be on the precipice of another recession.

We remain short USD/JPY. We booked a 120 pip profit on the first leg of the trade and we’re up 51 pips on the second leg (entered at 78.46). We’re moving our stop down to our entry on the second leg, ensuring that we’re now trading with house money. We really like this position right now and if we were a tad more greedy we would be adding to it. It looks to us like there might be a sharp breakdown below 77.75.

Our latest trade is in AUD/USD which is hovering around 1.0950. It’s going higher. Four days ago on Twitter (July 21) with AUD/USD at 1.0830, we wrote “Beautiful breakout in AUD/USD. That will be testing 1.10.” We’ve climbed 120 pips since then and we’re sure that the record of 1.1012 will fall. The catalyst is going to be a high Q2 CPI reading (above 0.8% q/q on the trimmed mean) today. We are buying AUD/USD asap with the announcement coming on Twitter via @FX_Button. We will hold it until the news turns better on debt ceiling talks.

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