This text is from blog famous currency strategist Joel Kruger .
VINDICATION – After sitting on a painful position for July and most of August, it is definitely great to finally see the bullish acceleration that had been expected in EUR/AUD back when the trade was established in early July. Back in early July I said that I would build into a long position at an average cost of 1.2000 (I bought 1.2200 and again 1.1800), with a target of 1.4000. But, most of the pain when the trade was underwater, came less from the personal monetary setback and more from the frustration that the markets were not seeing what I was seeing.
Daily forex technical analysis video from Joel :
THE REAL FUNDAMENTALS – Fundamentally, despite the intense slowdown in the global economy, the Australian Dollar still managed to outperform. Despite the onset of softer local economic data in 2012, the Australian Dollar still managed to outperform. And despite the very clear materialization of a spread of the US and Eurozone contagion to the highly Australian correlated Chinese economy, the Australian Dollar was still outperforming into the summer (July, August) of 2012.
THE REAL TECHNICALS – Technically, there was really nothing to talk about. The Australian Dollar on a longer-term cyclical basis was and still is overvalued and shows plenty of room for a much needed and sizable pullback over the coming weeks and months. The technical overextension in the EUR/AUD cross rate that saw this market move from around 2.10 back in 2008, all the way down to 1.1600 in 2012 was nothing short of obnoxious, and should now be the new textbook definition for a stretched market in desperate need of a major trend shift.
BLOCKING OUT THE NOISE – So, all the signs were screaming to take the long position back in July, despite those that said I was crazy for doing so. The opponents of the position said that the attractive Aussie yield differentials could not be ignored, and that even with some signs of slowing, Australia was still immune to the crisis in the US and Eurozone. But to me, this was simply not possible. After all, how could a traditionally risk correlated asset like the Australian Dollar also manage to behave as a safe haven asset? How could the currency benefit both as a flight to safety alternative away from the US and Eurozone and at the same time find bids on its risk correlated yield lure?
OUT OF TOUCH GOVERNMENT – For me, it was only a question of timing and fear that I would just miss the opportunity to benefit from such an amazing counter-trend set-up. Another key preventative to Aussie weakness over the past several months had been the Australian government’s reluctance to publicly concede that things may have been worse than they had been projecting. This certainly didn’t help, with all the upbeat talk from RBA Stevens and Treasurer Swan, playing right into the hands of Aussie bulls.
MAJOR TURNING POINT – But now finally, it seems as though even these officials can no longer ignore the elephant in the room, with the very real threat of an intensified China slowdown, and marked deterioration in Australian economic data (today’s horrid Aussie trade deficit and weaker China non-manufacturing PMIs only highlight) finally being appropriately recognized and dealt with. When looking back several months down the road (when the Australian Dollar is a major underperformer), I believe Tuesday’s RBA rate decision will be seen as the primary catalyst for the major turning point. I believe this to be the case less so because of this latest rate cut itself (which was very much needed, with more cuts needed down the road), and more so in the fact that the central bank finally reacted with a more dovish than expected move. Up until this point, it has been a story of the government and central bank for the most part painting a rosier picture.
TOO FAR BEHIND THE CURVE – To me, this only confirms just how out of touch local officials have been in gauging the health of the economy and potential risks from external factors, with a game of catch-up now in effect. The trouble of course, is that unfortunately, the Australian government and central bank have fallen too far behind the curve and will have a very difficult time trying to keep above water, in what should be some trying times ahead.
AUSTRALIA NOT ALONE – While Australia will be the poster child for the anticipated underperformance, the country will not be alone, and all those other risk correlated economies that benefited as safe havens during the US and Eurozone crisis, will now be at risk for major underperformance. To be more specific, look for major underperformance in the commodity bloc and emerging market currencies throughout Q4 2012 and for much of 2013. If you think the Australian Dollar has come off a lot over the past few sessions, just wait and see where this currency is trading in a few months. The bearish commodity bloc and EM trade is only now just beginning.
EQUITIES OF INTEREST
Cia Energetica de Minas Gerais (NYSE: CIG)
Although the company has taken a beating in recent weeks, technical studies are now well oversold and show room for plenty of corrective upside at a minimum. The fact that the dividend yield on this one is also highly attractive makes the ticker too hard to ignore at current levels. Perhaps the current setbacks will once again be well supported above $10, in favor of some fresh upside back above $14 over the coming sessions.
