The Experts

Clifford Bennett
Currency Expert
+ About Clifford Bennett
Clifford Bennett

Clifford Bennett is an internationally respected macro-economic and global currency markets forecaster, with over 20 years experience with leading investment banks. He is currently chief economist at Kinetic Securities.

Bennett was formerly Senior FX Strategist Asia, in Singapore, for BNP Paribas, as well as a member of the global economic forecasting team in London.

Bennett appears regularly in the global print and television media, such as the Financial Times, CNBC, and Bloomberg. Bennett is also the author of Warrior Trading, published by John Wiley & Sons New York.

Clifford Bennett has been ranked “the world’s most accurate currency forecaster” by Bloomberg News New York, out of a survey of the top seventy investment banks and think-tanks. 

Oil focus leaves foreign exchange markets thin

Friday, March 11, 2011

  • Greek concerns temper Euro rally
  • Sterling still volatile
  • Yen safe haven but oil vulnerable
  • Australian dollar bid range trading

The market doesn’t seem too sure what to do with the US dollar today, as it experiences some rather wide range trading. We favour a slightly bigger USD bounce, then sharp downtrend resumption.

We remain resolutely bearish on the US dollar. The re-pricing of the US dollar in a long-term historical sense has much further to go, and then there are the immediate issues of an under-performing albeit growing economy, near zero interest rates, and massive deficits. There is no doubt the US dollar is going lower in a medium-term sense, but more immediately there is a twist to the oil story.

The US has massive oil reserves in the salt caves of the south, and these have only been drawn on previously for war or the natural disaster that was Katrina. They are unlikely to be drawn on in this current upsurge in the price of oil, but the mere fact that they are there and exist, could spin its way into markets such that it reinforces the US and the US dollar as a valid safe haven target.

While oil stays elevated in the short term, the US dollar could also hang on, and perhaps strengthen a little further. Of course, any US dollar strength will retard further oil price gains, and in fact the oil price as of today is starting to show some technical signs of being overbought. When we see the media frenzy that currently prevails over oil, one has to wonder if it hasn’t reached ‘front page effect’ status.

The front page effect is when market news is making the front page of regular newspapers, suggesting it may be getting close to time to fade the rally. The basis being that at this point everyone who wants to buy, probably has. In such a market even more bullish news can fail to carry the market higher.

The oil market, in the short-term at least, is now vulnerable to bearish news. There is plenty of bearish news risk, from any further strengthening of the US dollar, to a resolution of the Libyan crisis. The market is already pricing in some contagion risk, which we do not think is a prospect, so failure of contagion to arise, and especially resolution of the existing crisis, is likely to trigger a very sharp fall in the price of oil in the near term.

Medium to long term we remain bullish oil, as we have for over a year, on the basis of strong global growth and accelerating cultural demand out of China and India. In the short term, however, the market has clearly rallied enough, and so the risk of a downward correction is high.

An immediate move to the downside in oil would not only generate a buying frenzy in global equity markets, as the last great fear evaporates, but also a resumption of strong non-USD trends, as well as eliminating the safe haven bias toward the US dollar.

The most likely short-term scenario is another 12 to 36 hours of US dollar strength, followed by a sharp resumption of the major downtrend. The steady erosion of the role of the US dollar and its value cannot be ignored.

Related articles

Oil focus leaves foreign exchange markets thin

All bullish

RBA expected to leave rates unchanged

Markets really looking good now

Another Buying Opportunity


All bullish

Thursday, June 10, 2010

The bears are still caught short all around the world. The avalanche of buying that could hit equity, commodity and Australian dollar markets is likely to be immense.

The fundamental situation globally is the best we have ever seen, even with, and partly due to, sovereign debt.


We got our favoured rally in oil yesterday and expect more of the same. The rally in oil is indicative of our grand bull markets scenario based on the best economic boom the world has ever seen. The pre-GFC global expansion was the entree and we are about to have main course. Not everyone is expecting it.

In fact, many are still searching for a double dip. Really, the only challenge with the global outlook is sovereign debt and that is being aggressively dealt with and, therefore, can now be placed in the “manageable” basket.

The only problems with the domestic Australian situation are a central bank that applies old-world thinking to averages of the past, hence having erred in hiking too quickly, and the catastrophe that is the resources tax. The RBA is hopefully on hold for an extended period and the domestic economy can just sneak through and survive at that 4.5 per cent. At this level of restrictive policy, the situation is “manageable”.

The solution to the resources tax is more problematic, as we have discussed before, but it is such a badly thought out and executed tax that it is unlikely to survive.

We remain of the view that the Australian economy is consolidating the recovery we forecast last year. This creates a bit of a plateau in the run of data, but as long as the RBA remains on hold and the resources tax is significantly modified or eliminated, then we can still see growth accelerating nicely into early next year.

The outlook for global and Australian markets remains decidedly bullish.

Globally, the fundamental story is one of all the major continents simultaneously expanding rapidly post-GFC. The global demand for commodities may well outstrip supply, especially in 2011, if Australian fresh commodity investment declines due to the resources tax. Strong commodity demand, combined with interest rate settings already too high with risk of going higher, will continue to support the Australian dollar.

Our previous forecast for the Australian dollar to achieve parity this year, set in December 2008, has had to be delayed until early 2011, due to the resources tax.

Technically, we have just seen a fantastic classic correction in markets all around the globe, in what remains a grand bull market.

The technicals are aligned perfectly with the fundamentals on this occasion. The price action displays how the misplaced and inflated fear over the sovereign debt issues in Europe generated an over-shoot to the downside for all global markets and that over-shoot is now being soundly rejected.

The ASXSP200 daily chart shows an expanding triangle consolidation phase, usually a bullish formation, that was broken to the downside by the unjustified panic over Europe. With plenty of follow-through technical selling, that down move has now had to be sharply reversed, due to the growing realisation that Europe will be fine after all. It’s all a bit like what happened with the Dubai scare. In a year’s time, hardly anyone will remember why they thought Europe was going to collapse.

All major trends are driven by the real fundamentals, but technical analysis can be very helpful in monitoring the emotional ebb and flow around the core trend. We remain firmly of the view that the “real” fundamentals are decidedly bullish, while we have just experienced an emotionally-charged bearish selloff based on false and, at times, unjustified scare mongering regarding Europe.

Global growth will be above consensus, and so too will most markets, especially the Australian dollar.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.


RBA expected to leave rates unchanged

Tuesday, June 01, 2010

Expect both equity and currency markets to benefit from a sign of wisdom from our central bank.

Though the risk is toward further tightening later in the year, we expect the RBA to remain on hold for several meetings. Significant uncertainty persists regarding sovereign debt, not just in Europe but also in the US, and the patchy and volatile run of domestic data continued with today’s retail sales and home approvals data.
Retail sales looked reasonable on the monthly aggregate, but they actually fell in NSW, and over the last six months the cumulative story is not so encouraging. Home approvals fell a very large 14.8% in April after rising 15.3% in March. This suggests that the sovereign debt crisis of Europe has had an impact on domestic lending approvals, and/or increased caution created by the aggressive nature of previous RBA rate increases. Overall we remain of the view that the Australian economy is in reasonable condition, but remains in need of further nurturing.
The added uncertainty in terms of business and investor sentiment engendered by the proposed resources tax will also weigh on the Reserve Bank of Australia’s thinking. It was the supposed inflationary pressure of the resources boom that played a significant role in the RBA’s prior rate hikes. With many projects of all sizes now on hold, some perhaps even cancelled, surely the RBA will recognize that an extended plateau in rate adjustments is now absolutely necessary.
There is no doubt the RBA will remain on hold today. The accompanying comments are likely to suggest further monitoring of global economic events, and evidence of sustained growth in the Australian economy, are necessary before further increases occur in the official interest rate.


Markets really looking good now

Thursday, May 27, 2010

The price action in all markets is very encouraging, as per this mornings comments. Even Oil looks to be basing here.
As everyone knows China/Asia is very strong, and the US is coming back on line. The debate or scare mongering has really been about whether Europe will slow and the impact on global growth. Well the truth is even if Europe did slow, the impact on global growth would be to take the edge off a large global GDP number, and not by much.
Europe is the world’s largest economy, but with strong export growth already occurring into Asia and a now much lower Euro, European corporations can be expected to post above consensus earnings. We were the only firm upgrading our GDP forecasts for Europe last week, to 2.0% by year end, but expect other firms will now start to follow.
The whole saga was all about fear, and I can only reiterate an early today tweet that this sovereign debt crisis will be about as significant to markets in a year’s time, as the Dubai debt scare is now. Keep buying Europe, especially the luxury fashion brands.
The Euro has bottomed last Wednesday as we forecast the week before. We are looking for a move back to 1.3000 in coming weeks, partly due to euro strength on sound fundamentals, but also as a consequence of an exhausted US dollar rally. The repatriation of the US managers and wealthy individuals has been extraordinary. They really were convinced the equity market was going to go below last March’s lows.  
With full US repatriation having occurred who is left to buy the US dollar, and having withdrawn investment capital from the rest of the world, especially impacting Australia, how is the US going to enjoy the strong rest of world growth over coming years? The Americans will have to come back at some point, or fall further behind the spectacular success of Asia.
Amazing but true, and well that gives the rest of us the opportunity to again get long a grand bull market, perhaps the best in our life times at a fabulous entry price yet again.  Yes some volatility will remain, but the ASXSP200, the Australian dollar, BHP etc all look outstanding.
Talking to someone yesterday it seems this resources scare has hit small cap resources very hard. It hurts I am sure, but prices and investment levels will not stay down here for long, and we should all have already decided what we like and be getting ready to pounce. Even with a resources tax threat, and I call it a threat, because it is just too silly to get up, the market has way over shot to the downside.
Please note we will be producing our own brief tax review tomorrow. The Government has made such a mess of things that rather than keep complaining, it is important to find a path forward for everyone. Global investors need reassurance, and a modified ALP plan, to say 30% after interest payments and above twice the government bond rate may be appropriate, combined with a coalition commitment to no tax, just might do it.
Yes there could be some slight volatility, but believe yesterday’s sell off was more a hang-over than a new party, and the dominant risk/direction is up!


Another Buying Opportunity

Tuesday, May 25, 2010

The negative spin on Europe looks a little bit last gasp-ish of the bears to me. I know everyone is bearish again today, and the market is significantly lower, but we need to put this in the context of recent volatility.
The takeover of a small savings bank in Spain by authorities, is an entirely appropriate and reasonable action, and in fact confirms the viability of the banking system in Europe. The US has been taking over savings banks at such a rate, the media no longer bothers to report them. The Spanish situation confirms the system works when it needs to. Furthermore, declarations of expenditure reductions by sovereign states in Europe is proceeding apace. Germany yesterday signalled a 10 billion euro reduction in spending, and Spain and Italy are announcing expenditure cuts as well. At this rate Europe will far out-perform the US in addressing its debt issues. The stalemate in deficit reduction in the US shows no sign of changing.
The ASXSP200 has rallied two hundred points, and has now corrected 80 points. This is reasonable, especially when you have the bearish “fear” headlines we are being swamped with again today. There is no threat to recent lows, still some 150 points away. While the immediate downside pressure needs to be respected at first, it again looks like an opportunity to take a nibble at some of your favourite stocks. Would prefer to be a buyer of the dip.

The AUD has dropped on similar news. And the market appears to be searching for the RBA. Tend to think they could be closer to 81 cents than 82 cents, but any free fall will attract their attention at this stage. We had suggested .8190 yesterday as bottom of the short term range, and that may well prove to be the case. Prefer to buy the dip. 


Up Up and Away!

Wednesday, March 31, 2010

As we continue to get our favoured further bull trend development in equity, non-USD currency and commodity markets, it is once again a question of just how much catching up some of the main players still have to do?

A recent industry poll had two thirds of the Australian funds management industry expecting a bear market, and that was only last week, when here we are at new highs. As I said on the Switzer show at the time, the more evidence there is of funds still being underweight, the more bullish one has to be.

It really is all pointing toward the risk of widespread capitulation on the upside.

Right now many an investment committee at many a fund manager, not just in Australia but around the world, is deliberating, perhaps heatedly, on why they are still under-weight equities and when to bight the bullet and just buy at market, or whether to again wait for a dip? This is all great news for those of us who have been consistently bullish from the beginning of the grand new bull market. It has been going for a year now, and some are still arguing about whether it is a bull market.

The bears within these committees will be speaking of sovereign debt as some great tarnish on the global economy that will collapse everything. Far from their perspective will be the idea that individuals, small businesses and large corporations are simply getting on with the project of making money in this incredible period of entrepreneurial opportunity. This is to me the key point of sovereign debt, it does not stop private enterprise, and successful private enterprise is now globally all encompassing, and will generate far greater tax receipts than any of us currently anticipate.

ASXSP200 Daily The correct fundamental value at this stage of the recovery is probably about 5,000. So the market is running close to value, and by year end we continue to look for 5,600.

Yes, sovereign debt is a problem, but it doesn’t stop the world from going around, so you better grab those stocks you want at whatever the current price is, because you simply may not see that price again in this lifetime, especially if it is a resource company.

In our view we have just started the most sustainable and sound global economic boom period the world may have ever seen. At a minimum it will last five years, most likely fifteen years, and possibly well beyond that.

The reasons are greater global communication, the eradication of trade barriers, transport technology, global population growth, human aspiration and the possibility for that aspiration to be fulfilled, across Asia, South America, and in the years to come in Africa.

Nothing lasts forever, but the current first year of a new phase of tremendous global growth seems to be pointing in all the right directions. While the major players deliberate the opportunities abound.



Expect a sharp US dollar collapse

Thursday, March 11, 2010

  • US dollar collapse imminent
  • Commodity Prices higher
  • Commodity currencies higher
  • Equity markets higher

Yes, sounds a little sensational but across the board the US dollar has moved to a position of being close to a sharp resumption of its long term down-trend, which would be great for the US, the world, and markets.

The recovery of the US economy back to sustainable trend potential is, I have long argued, dependent upon a strong rest of world economy and a weak US dollar. We have the first, and may be about to get the second.

A sharp decline in the value of the US dollar is appropriate, and would significantly boost commodity prices, commodity currencies, the US equity market, and commodity nations equity markets. This could be quite a substantial and sustained fundamental price shift lasting several years.

A quick pullback in the value of the US dollar, even within the construct of recent ranges, will significantly alter the structure of world asset markets for the rest of 2010.

European equity markets may not benefit in the same way, and are likely to lag both the US, and commodity equity markets. While the negative hype over Greece and other European nations has been overdone, this sentiment will weigh on the Euro a little, and the Euro-zone does not have as strong a commodity story as others. We are still bullish Euro, but mildly so.

AUD/USD Weekly since 2000

2010 year-end target remains US$1.0300.

The major factors involved in the long term decline of the US dollar, many of which I have been arguing since 2000, include:

  • The bursting of dotcom exposed US markets as being as vulnerable as anyone else’s
  • Various accounting debacles made global investors more cautious
  • Possible military over-extension
  • Loss of sole reserve currency status
  • Current economic under-performance
  • Near zero interest rate policy
  • The rise of intra-regional trade globally creating attractive investment opportunities outside of the USA

The US has got some things wrong, all nations do, but overall it is still the benchmark for capitalism in many ways. It is just that other nations have been aggressively aspiring to the success and quality of life, many Americans have experience for several decades now.

It really is a case of the rest of the world, catching up to the USA.

The US is simply experiencing a falling back into the pack, as opposed to having previously been the clear leader of the pack.

When you unwind the prior aspects of the US dollar that are no longer as valid, such as, sole reserve currency status, the best place in the world to make money, and reasonable interest rate yields, and you incorporate the new reality that the US will be just one of the three major powers in the world over the next several decades, they being Europe, China and the USA, then it is clear a significant re-pricing of the US dollar to a lower level is appropriate.

There is the question of whether such a repricing has already occurred.

Certainly we have already seen the US dollar lose a tremendous amount of value, from Euro 82, and Australian dollar 48 cents, for instance. Nevertheless a revisiting of the Euro 1.50 1.60 levels seems a relatively modest expectation from here. The outlook at Herston on the Australian dollar is well known, and we still see potential for a move to US$1.03 this year.

The smartest thing an American could do at the moment is to invest overseas, particularly in commodity markets as global demand continues to pick up, alongside their softer currency. The smartest thing an Australian could do right now is invest before the Americans do, as they will push prices higher.

The reason I am making a major point of the fragility of the recent US dollar rally today is that it looks to be losing steam on a variety of technical criteria. Should the US dollar begin to fall, and fall sharply as I believe is possible, the corresponding movement in commodity markets, and commodity currencies, could be of an even greater magnitude. Many investors have been cautious over the last couple of months due to absurd suggestions of a major double dip recession, not to mention the recent furore regarding Europe and even China. Global markets are at the moment not fully pricing the sustained grand economic boom we have just begun.

The US dollar has rallied on concerns regarding the rest of the world, and that rally is petering out, just as manufacturing and other data around the world is pointing clearly toward strong growth.

As global sentiment improves rapidly over the next week or two, long US dollar positions will be unwound, and many investors will suddenly recognize their under investment in the grand global growth story. There is real potential, particularly with any sudden drop in the US dollar, for commodity, equity, and commodity currency markets to be catapulted higher. 


Good news for the US

Monday, March 01, 2010

Having been fortunate enough to be invited to speak at The Australian Resources Conference US, held in Denver these past couple of days, I have also discovered just how new the Herston message of the rest-of-the-world is doing just nicely thank you very much, is, in the USA.

In previous reports, I have often spoken of how US originated investment and market research seems to be looking to place a negative spin on anything China or European. Well, it seems, they are completely unaware they are doing this. I have a couple of meetings in New York with some senior economists and brokerage houses at the end of this week, and will let you know what I discover there, but it seems Americans still honestly believe, that if things are tough in the US, they are tough in the rest of the world as well. This is understandable, because until recent years that has been perfectly correct.

Even today, we have this bizarre behaviour of buying the US dollar because US consumer confidence was worse, much worse actually, than expected. The Conference Board’s index of US consumer sentiment declined to 46, the weakest level in 10 months. So what happens, the equity market gets sold off, and the US dollar is bought. What absolute nonsense this is, there is no other word for it.

However, I am now coming to understand why this keeps happening. US research from banks and brokers is being produced by people who still believe that if things deteriorate in the US, the world will suffer even more severely. This disconnect from the new reality; that even if the US has zero growth, the rest of the world will do fine, and if the US only grows modestly the rest of the world will do even better, this disconnect in research being provided, is driving short term speculators in the wrong direction.

What we will eventually see one day, one day soon, is a bad data release from the US but surprising to the many, no further rally in the US dollar! At that moment, the US dollar will begin to crash. I had previously expected a steady decline in the value of the US dollar, but this false and fundamentally entirely mistaken response to patchy US data, to buy the US dollar, can only last so long. Once it begins to unravel, it is likely to do so with a vengeance.

Other data today out of Europe also showed soft consumer confidence. Of course, the press in the US today is about how soft consumer data in both the US and Europe signals that equity markets may have got too far ahead of themselves on global growth expectations. Yet again, the west is missing the point. This new global growth period is not about the west, it is about the emerging economies that one could argue, have already emerged.

At Herston we remain decidedly bullish US equity markets, because the global revenue streams of US multi nationals will continue to exceed expectations, and when combined with a declining US dollar will deliver strong profits. The US will run at 10 per cent unemployment, but with strong corporate earnings. We remain decidedly bullish the rest of the world equity markets because of strong robust growth in Asia and South America, as well as a Eurozone and USA that will grow modestly through the year, and improve again modestly in 2011.

Commodities have also been sold down today due to the consumer confidence data. As with equity and currency markets, I continue to favour buying the dip in all these markets.

Nothing has changed, China remains strong, we still forecast 13 per cent GDP in Q2, the world is growing strongly through "intra-regional" trade, a term I coined a few years ago to explain how the nations of various regions are now doing a lot of business with each other, rather than the old USA centric model. Global growth will be above consensus with or without strong US consumer confidence.

As I send this the US equity market has already started to recover from the consumer data sell off. These markets, equities, non-USD currencies, and commodities, are all very fundamentally oversold at this point.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.



The storm has passed!

Thursday, February 18, 2010

All markets are strengthening as favoured, as the worst of the storm in Europe appears to have passed. The Euro rally confirms to all markets that the global outlook is strong.

Currency markets have been weighed down by a bizarre mix of over-hyped concerns regarding European sovereign risk, and a safe haven move toward the US dollar.

Why this is bizarre is that the US budget deficit is deteriorating at a rate of about 10 per cent of GDP this year, while the Euro-zone is running a six per cent deficit. Furthermore, the Euro-zone is the world’s largest economy, and has a roughly balanced trade situation, compared to the massive deficit of the US.

European political leaders have responded brilliantly to the attempt by some major banks to create a panic about Greece. Instead of bailing the banks and funds out of their investments in Greece, they have taken the prudent route of simply asserting to markets that Europe as a group will make sure Greece fixes its own situation, as painful as that may be.

By merely stating that the major nations will act if necessary, but expect Greece to provide a strict timetable to better fiscal health, there is no argument for a panic.

All that is left is for those bearish speculators who tried to corner the Greek bond market and the Euro, to now get out of their positions as quickly as possible. This involves equity markets as well which should rally strongly, but the real opportunity at the moment is probably in the Euro.

Though perhaps not spectacular, the outlook for the euro-zone economy remains positive.

EUR/USD daily

Middle of the range of the last two years, with about as much negative news as it could get, suggesting it may be time to buy again.

EUR/USD hourly

A move above resistance at 1.3800, 1.3850 would significantly encourage the bottoming scenario.

While the fundamental balance to us remains clearly in favour of the Euro, versus the US dollar, markets have spent a lot of time going the other way of late. If our fundamental view is correct, the Euro market will have to turn around and play catch up to where it belongs at much higher levels than this.

We believe the Euro belongs in a 1.4200 to 1.4800 range over coming months.

Year-end target is 1.5200, possibly 1.5600.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.



Aussie dollar looking good

Friday, February 12, 2010

Strong employment growth supports Australian dollar, but don’t expect immediate rate hikes.

Australian unemployment fell to 5.3 per cent in January, which was no surprise here.

Last year, we correctly predicted unemployment would peak in the 5.7 per cent to 6.1 per cent range, despite the government’s 8.5 per cent forecast and some banks suggesting 10 per cent, Herston continues to forecast unemployment to fall to 4.9 per cent by the end of this year. However, contrary to the reaction of those surprised by today’s data, we do not expect this excellent employment trend to place additional upward pressure on rates. I continue to argue the RBA will stay on hold at the next meeting, and rates should only reach 4.25 per cent by year’s end.

This is in keeping with our consistent outlook for a strong economy that will nevertheless experience only modest inflation. The old idea of growth equals inflation, no longer applies in the manner it once did. Competitive price pressures will drive productivity gains, rather than consumer end price rises.

The Australian dollar has almost achieved our 89 cent target for this week set on Monday with clients at .8670, when the whole market was bearish. The employment data, strong for full and part time work, has certainly helped the currency today, but the background pressure is one of a market caught well short in a fundamentally very strong bull market.

Australian dollar daily

The Australian dollar has just resumed the long-term bull trend toward 1.03 this year, and 1.08 to 1.12 in the years to follow.

The Australian dollar selling, which was generated by misguided suggestions of currency Armageddon due to Greece, now has to be bought back, but at the same time exporters need to hedge everything they can.

The Herston suggestion to Australian exporters is that they should be fully hedged at least three years out, and perhaps five. This is a long term AUD price shift to higher levels.

Herston Economics Australian dollar forecast remains US$1.03 this year, and our further two to three year outlook, set at 68 cents in 2008 when the majors were forecasting 60 and 55 cents, remains US$1.08 to US$1.12. 

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.


What's next for the Aussie dollar?

Thursday, February 04, 2010

The China story, and Australia’s ability to capitalise on the twin blessings of geology and geography, cannot be under-estimated.


This is the third week of steady selling of the Australian dollar, quite possibly a large global fund taking big profits, which would make sense given the full pricing of good news that can be argued to be the case near term. While a low is favoured at current levels, a last spike over-sell to .8650 cannot yet be ruled out.

The big picture is however quite possibly beyond any consensus expectation. If our long argued view of the world moving to three equal power blocks, Europe, China, USA, is correct, then the US dollar still has some substantial re-pricing to the downside to do. When you look around the world for a currency that will do well in a declining USD environment, the Australian dollar stands out.

The Australian dollar is also seen as a liquid, indirect, but effective, way to be involved with the strongest growth region in the world. Being long the Australian dollar allows global investors to benefit from the China story, while at the same time maintaining immediate liquidity for a quick exit should the case arise.

The Reserve Bank of Australia decision to pause the hiking cycle was an intelligent one, and global investors are looking past the lack of further immediate hikes, to the reality that they can be long the China story in a liquid market, against a fundamentally weak US dollar, and all the time be earning one of the highest interest rates in the western world, just where rates are now at 3.75 per cent.

Parity to the US dollar remains possible by year end, and in coming years $1.08 to $1.12.

AUD daily  

The Elliot Wave count on the Australian dollar up-trend is another indication of the potential for still more upside. Within this structure, a deeper correction than so far seen is possible, but tend to favour this flag like formation dominating for a major low to be made in the near future.

AUD hourly  

Somewhere between 88 cents and 86.5 is the bottom of this corrective period, and if we get back above .8960, early warning .8905, then we have the low confirmed. Favour the upside from here, but technically we need breaks back above those .8905 .8960 levels to confirm.


Little Trouble in Big China!

Wednesday, February 03, 2010

The Dow Jones Index went very close to our first support at 10,040 on Friday, and it was indeed a bearish close, but manufacturing data out of China today again depicts a sound robust economy. Equities, commodities, and even the Australian dollar, are still expected to begin a recovery mid this week.

This is the danger zone however, today and tomorrow will have the bears feeling remarkably satisfied and confident. As well they should as they are the ones who have got it right of late. While we perceived some downside risk, the market has fallen much further than anticipated. The reasons for the fall remain concerns about US and China growth, yet the data still points to perhaps both doing better than consensus forecasts.

China Purchasing Manager’s Index at 55.8, further confirms the broad based strength of the economy. This was a slight easing from November’s 56.6, but that was the fastest pace of manufacturing expansion since the start of 2008, so this is still a very impressive number. As growth around the world steadies at a sustainable level, exports should pick up significantly from the panic lows of last year, suggesting on-going strong demand throughout the year.

Markets are markets however, which means they are capable of doing anything, and having lives of their own despite the fundamentals. At this point though, equities and commodities are down what could be viewed a healthy amount. After global markets rallied 60 per cent, and in some cases 70 per cent, last year, we have so far corrected only about 7 per cent. One way of looking at it, is that we have corrected about 10% of the gain. So, far from panic, and despite having been on the wrong side of late, the view here remains decidedly bullish.




US dollar continues to strengthen

Friday, January 29, 2010

The US dollar is a lot stronger than anticipated, even with US rates remaining near zero. Our start of year scenario was for a few weeks of potential US dollar strength, but this has gone further than anticipated.

US new home sales were down again in December, a whopping 7.6 per cent. Though the severe weather would have had a big impact, the full year numbers reflect a decline of 23 per cent. No wonder the Fed has reaffirmed its intention to stay on hold near zero for an “extended period”, though it will cease its US$1.25 trillion intervention in support of mortgages.

While I still feel the best course for the Fed would be to gently very progressively lift rates by 25 point increments from March or April onwards, the risk to this scenario is clearly that the Fed may be on hold for longer. The US as forecast here remains the laggard in terms of economic recovery. This slowness of the recovery will show up mostly on main-street, while earnings of US corporations with global revenue streams will continue to firm nicely. Our outlook for strong profits alongside high unemployment remains in place, hence the Fed dilemma.

Meanwhile the US dollar continues to bound ahead, despite the seeming reluctant US recovery and the commitment of the Fed to maintain a near zero rate policy. US dollar strength on the day is being aided by the administration’s decision to extend the tax incentives for purchases of equipment. That could be a US$38 billion boon to corporate America and is an appropriate measure to better entrench the nascent recovery.

Overall though, US dollar strength over the last couple of weeks seems to be more about the effectiveness of US research depicting China as a bubble about to burst. We continue to argue that the China boom is just getting started, but as price action in equity and commodity markets shows, most of the market is taking a cautious approach as China dabs the breaks. The slow-down in lending to satisfy “reasonable” borrowing needs looks set to continue. The impact on speculative activity could be more serious than I first thought, though real borrowing activity for construction and actual business activity is likely to be maintained. Perhaps of most interest is the strong linkage now in place between what happens in China with what the US dollar is doing.

As the US dollar breaks through Euro 1.4000, the question will begin to be asked whether the US dollar is getting too strong on fundamental grounds.

There was clearly a joint “political will” in the background of the US dollar retreating from the Euro 1.5000 area. Similarly, Sterling has maintained a remarkably clear though wide band since the start of last year, and some other currencies are exhibiting such behaviour as well. Most likely some large speculators and hedge funds are piggy backing off the “political will” to maintain some stability in currency markets post the GFC. This may even extend to central bank activity, though probably low key, when combined with back room jawboning the potential for unofficial bands to develop is clear. All this will do of course is delay the day of reckoning for the US dollar when it will most likely move to 1.65 or 1.85 Euro.

The more immediate question is if there is a back room unofficial band for the US dollar and the top of the Euro band is near 1.5000, where is the bottom of the band? My bet would be that around Euro 1.4000 is the number with short term overshoot potential to just 1.3900 1.3700 possible. If correct, then we are right now very close to a turning point, though even this Euro bull would have to admit the price action on the day is still incredibly bullish the US dollar. For the moment respect the immediate Euro downward pressure, but a recovery of resistance at 1.4115, early warning 1.4065, would suggest a recovery was getting underway. Favoured low points are 1.3930 and 1.3850, but watching for a low today or tomorrow, rather than pre-empting.

The Australian dollar below 90 cents represents remarkable value, and while expecting some downside, I did not think exporters would get such a good opportunity. The view here remains for strong support in the .8910 to .8810 area to generate a resumption of the long term up-trend. A move above resistance at .9050 .9150 would signal another long term low had been seen. On the day .8910 .9005 tells a story. Looking for a low here. 

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.


Australian Dollar: Buying the Dips!

Friday, January 22, 2010

The Australian dollar repeatedly has sharp and sometimes significant sell-offs. The reasons are often similar, and this allows us to take advantage of these better buying levels.

Australian dollar daily chart, showing a very firm major up-trend to our targets.

With global growth running strongly and demand for commodities steadily increasing, the domestic scene of firm economic growth and relatively high interest rates, means the Australian dollar will continue to head higher. As suggested at the start of last year, our 2010 target remains US$1.03. The 2011 potential remains $1.08 to $1.11.

Along the way though we will continue to get these significant sell-offs, as just witnessed, which can be quickly recognised as better buying opportunities when we consider the repetitive pattern that drives these drops in price.

The dominant bullish fundamental factors I have highlighted for the last year remain in place. That is, the geological wealth of Australia, combined with the geographical good fortune of being on the doorstep of the fastest growing economic region in the world, Asia. There is no better economic scenario anywhere. What then creates momentary waves of selling of the Australian dollar are news events or economic releases that question the strong growth expectations for Asia, especially China, or the prospect for continuation of a significant interest rate advantage.  

This week, we saw the Australian dollar sold after China required its banks to maintain an additional 50 basis points of reserves as a means of dampening lending.

The headlines out of the US highlighted that this would have a slowing effect upon the Chinese economy, and commodities and the Australian dollar were aggressively sold. In fact the central bank’s taking of this step was a sign of concern that the economy is starting to overheat. That is, the problem is one of a too strong economy, which of course leads to even greater demand for commodities than we may have currently anticipated. It is unlikely these banking measures will have much impact, let alone derail the rampant growth taking place. The Australian dollar therefore remains a strong buy.

The important observation to be made however, is how particularly US research frequently spins the negative out of any news regarding China. For whatever reason this occurs, ingrained disbelief that the US could be challenged economically by China, or even simple jealously of Chinese out-performance, it is important to note that it does occur. Unfortunately, the majority of Australian banks and brokers are too quick to simply pass on the views coming out of the US each morning to Australian clients. If we can recognize such spin for what it is, just spin, then we can be emboldened to buy the dips in price that such morning news often creates. The outlook for China remains remarkably strong.

The interest rate sell-offs also follow a pattern. Any negative Australian economic data release is immediately seized upon as a possible indication of the RBA being on hold, and therefore a reason to sell the Australian dollar. The real issue however is the margin to US interest rate levels. Even if the RBA is on hold, and I believe they should wait until mid year before hiking again, Australia will maintain an irresistible interest rate advantage that will continue to support the currency. Again, standing back from the news of the moment, we can see that the big picture validation for further Australian dollar gains, remains in place.

In summary, appreciating that what we are seeing in this major up-trend of the Australian dollar is a valid reflection of long term economic forces, allows us to correctly perceive both attempts at spin, or simple over-reaction, to short term news stories. The depth of any particular sell-off will always be a challenge to estimate in real time, but when stabilisation in price occurs, we can quickly grasp yet another opportunity in what is likely to remain a relentless up-trend to much higher levels.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.