This text is from blog famous currency strategist Joel Kruger .
JUST A CRAZY OBSERVATION – While the conventional explanation for outperformance in the Australian Dollar is the attractive yield differentials, stable economy, and proximity to China, I would propose a more off the beaten path explanation for the strength in the currency which might be borderline conspiracy theory (just having some fun here). Over the past several years, it seems like more often than not, Australian economic data has managed to come in on the better side of expectation. Remember, markets do not respond to data being good or bad, they respond to where the data is relative to expectation. Therefore, if the consensus is for a really bad number and data comes in just bad, the net reaction is still positive. So I ask….is the already high flying Australian Dollar finding additional support from some unreliable consensus estimates…or am I just crazy? I would welcome an overlay chart of any key Aussie data with actual outcome versus expected outcome over the past several years (send to firstname.lastname@example.org).
See daily forex analysis made by Joel :
I THOUGHT YOU HAD MY BACK – Moving on, I have been looking for a medium-term higher low in EUR/CHF for some time now, after advocating fresh buy opportunities below 1.2100. While I still believe this cross rate heads significantly higher over the medium and longer-term, I have grown impatient and somewhat concerned. A recent article in the WSJ stoked some of my fear, after SNB Jordan was interviewed on the subject of the 1.2000 floor. While the central banker reaffirmed the commitment to defend the 1.2000 floor, he also said “how long the floor remains in place will depend on global developments”……Not exactly the full backstop unconditional reassurance I thought existed. Admittedly, my stomach turned a bit when reading this, and while it probably doesn’t change much, this in conjunction with recent reports showing a reduction in Euro purchases and diversification into other currencies, have been enough to take me out of the EUR/CHF game.
PORTFOLIO ADJUSTMENTS – As far as broader price action is concerned, I still would be on the lookout for a more aggressive across the board US Dollar rally in the final weeks of the year. I believe that this rally is already underway, with the recent daily close in EUR/USD below 1.2800 setting the stage. I have also advocated looking to aggressively buy the EUR/AUD cross rate (long from 1.2100 with interest factored) as I see plenty of room for upside in 2013, with the market projected to trade back towards and through medium-term resistance around 1.4000. So how can the short EUR/USD and long EUR/AUD play work. Well…I see a scenario where risk off trade dominates, and the China outlook becomes gloomier. This will likely result in a lower EUR/USD rate, but even more aggressive decline in the AUD/USD rate. Obviously, from this analysis, it is clear that my favorite trade is a pure short AUD/USD play, and I have therefore positioned accordingly. My net short Aussie exposure is now aggressively weighted through the USD. At the same time, if you are not as enthused with the idea of having long USD exposure, but are still Aussie bearish, the long EUR/AUD play might be an attractive option with a less painful negative carry.