I had my fill of currency trading when I was a kid, so it’s a rare environment that will push me out of the sofa – but the stars are aligning for the commencement of a serious commodity unwind. We’ve been through the many arguments before – tightening liquidity in China, the impending maturity of QE2, the Middle East premium in oil, the market being heavily tilted towards the risk and commodity trade and, more specifically for the AUDUSD, the excessive leverage of the Australian economy.
So why act now? It’s because the enthusiasm for the Aussie Dollar is fading. We wrote about it the other day with respect to capital flows (here). Zooming in on weekly basis, we can see the slow turning of the Queen Mary (or is that a Capesize bulker?) in terms of the divergences in momentum, RSI and MACD. Look back in history, such events are few and far between and have a high correlation with corrections.
Another leg up in prices is not out of the question – it would be welcome if a little uncomfortable. But these indicators are clearing showing that the appetite for the AUDUSD is fading. Over the next 3 months, there is likely to be a increasingly not-so-subtle shuffle to the exits for the risk trade – we can expect the Aussie to be a casualty of this trend.
Conclusion – The portfolio has been underweight banks and industrial resources for some time – with counterveiling longs in energy, gold and agriculture (that may be due a further trim). The new short AUDUSD position is a six month view – the cost of carry will accrue to just under 3% over that period, so looking for a test of ~0.9000 in the first instance. In the event, that we do get a pop to 1.03/1.05 in the near term, then the position is likely to grow.