Last Saturday, I came out as “EXTRA” bullish the AUD/USD for the week. I even got more bullish after the NZD/USD debacle: (Am I Dead Wrong on AUD/USD?). I initially bought the Aussie at .7910s and then added when it dipped into the .78 handle. After that, it was smooth sailing into the .8100 handle where I closed out the position. Even before that, I had been buying short-term AUD/USD positions since the .7680s or so (see Stevens is a Smart Chap; April 21st). Thus, it’s nothing new that I’ve been eyeing longs on the AUD/USD.
I don’t know of a single sell-side bank that’s bullish the Aussie right now. Heck, Morgan Stanley even has the courage to say that everything except the AUD is likely to gain against the USD in the coming weeks:
“While we expect USD to retrace against most G10 currencies over coming weeks, AUD is an exception where we see room for continued USD strength, due to idiosyncratic AUD events. The market is only pricing in a 50% chance of a cut by year end, and we think this is likely to rise – the upcoming RBA minutes will be important for this view. As a result, we see scope for AUD to weaken.”
Of course they do! Let’s see what they are predicting for the end of 2Q 2015: .7400. I could post these forecasts of all the major banks and you would see similar results.
When such “divergences” in opinion occur, one must work extra hard to reconcile. You can’t dismiss these guys because they are generally smart. However, you have to challenge them because they’re also slow in reacting to market events and don’t change forecasts very often (who wants to be looked upon as a flip-flopper, right?). They also tend to herd together.
The Aussie runs two risks this week: RBA Assistant Governor Lowe is speaking on Sunday night (NYC time) and we have the RBA minutes on Monday. With the former, you can probably expect some jawboning that will likely get bought at some point.
Some market participants expect the minutes to create downside on the Aussie, which I can’t say is irrational. Given that the RBA cut rates last time, they expect some negative commentary. Sure, but the market bought on the rate cut and it seemed like the RBA went neutral, which means that there are some positive news in there too. I prefer to stick with the latter.
At the time of the RBA rate decision, my default plan was to buy anything.
I continue to hold the position that any big dip should be bought. As for technicals, I’m going to keep it pretty simple here with the AUD/USD. Let’s look at the daily chart:
The Aussie stayed in that green box for 3 months. In that timeframe, you had an Australian rate cut, an expectation for another rate cut (which actually happened too), and you even had a Federal Reserve that was going to possibly hike in June (pre-March 18th, “Fed blinks”). Let me add a few more: Iron ore prices were also collapsing, oil hit a new marginal low, Chinese data came out poor.
I ask you this: What else could a short AUD/USD have asked for? Nothing.
All of that happened and AUD/USD held .7500 like a champ. It’s no surprise that we’re now rotating out of the range and net-positioning on the Aussie has gone positive. We just had a second week in which the net-long position grew. I’m not even slightly surprised.
Before calling for the end of the AUD/USD, let’s at least see that orange trendline break. Until then, here are few more positive technicals:
* Bullish engulfing candle on the monthly chart (April) which also closed above the 200 monthly moving average. And this is after an extended downtrend…
* The weekly chart has rotated out of the range (closed above .7920s)
* Daily chart shows higher highs and higher lows
* 4-Hour chart has a flag pattern right now that points to .8280s (see wedge/flag that was broken on Friday).
Now to some inter-market analysis. We all know that the Aussie tracks copper and iron ore pretty closely. We start with copper:
Copper is leading here and one could argue that the Aussie has some catching up to do. Note how Copper has stalled at a key support/resistance level. If it breaks to the upside, then the AUD/USD bullish thesis becomes even stronger. This key level on copper also matches the 61% Fibonacci retracement of the 2014 high-2015 low. This is a make it or break it moment for the metal.
On to iron ore:
This guy has been trailing but a few important technical breaks have happened: It managed to get above the trendline from the 2014 highs, it broke above the massive down candle, and we’re seeing a V-reversal off the lows. I don’t know about you, but I don’t bet against V-reversals after a super extended downtrend.
All in all, both copper and iron ore support this AUD/USD rotation from the range. Lastly, let’s get to the China matter. Oh yes, China.
The China slowing down story is not new. Anyone selling this narrative would have sold AUD/USD at .90 and .80, and will continue to peddle that story at .70 and .60. In my view, that story is already priced-in for now and the risks are for upside. How about we sell at .8500 as a compromise ? :). Anyone looking at the Bloomberg China GDP tracker is already looking for bad news – it won’t be a surprise.
Take a peak at this week’s expectation for the HSBC Manufacturing PMI.
Surprise! We’re expecting it to climb. What if it beats? This is the positive risk for the Aussie as we enter the new week.
In the end, I’m not “extra bullish” the Aussie right now like last week; however, I’m looking to bet for more upside (regular bullish). Until that orange trendline breaks, I’m looking to buy dips.
I will turn neutral AUD/USD if it breaks the following levels on a daily closing basis: .7926 and .7830.