Australian Dollar

A look mostly at prices in the currency market and the outlook.   

Those hoping for a slew of negative news to push stocks much higher today will be disappointed in this largely catalyst-free day. So far today we have gotten only the ECB's weekly 3y LTRO announcement whereby seven banks will repay a total of €1.1 billion from both LTRO issues, as repayments slow to a trickle because the last thing the ECB, which was rumored to be inquiring banks if they can handle negative deposit rates earlier in the session, needs is even more balance sheet contraction. The biggest economic European economic data point was the EU construction output which contracted for a fifth consecutive month, dropping -1.7% compared to -0.3% previously, and tumbled 7.9% from a year before.  Elsewhere, Spain announced trade data for March, which printed at yet another surplus of €0.63 billion, prompted not so much by soaring exports which rose a tiny 2% from a year ago to €20.3 billion but due to a collapse in imports of 15% to €19.7 billion - a further sign that the Spanish economy is truly contracting even if the ultimate accounting entry will be GDP positive. More importantly for Spain, the country reported a March bad loan ratio - which has been persistently underreproted - at 10.5% up from 10.4% in February. We will have more to say on why this is the latest and greatest ticking timebomb for the Eurozone shortly.

The dollar rallied in the second half of last week, but looks set to consolidate first before extending the rally.  The yen was not the weakest major currency.  That dubious honor goes to the Australian dollar.  

The yen is weak AND the dollar is strong. Two forces at work. Discuss.

When three hedge fund titans all explain in words so simple a financial media channel morning show host can grasp that there is nothing behind this rally but smoke, mirrors, and a bearded academic, it seems more than a few people start to pay attention. Following Paul Singer and Kyle Bass, Stanley Druckenmiller "loves the market short-term, but hates it long-term," since Bernanke is "running the most inappropriate monetary policy in history." He warns, for it is a warning, that "markets will melt up," until the Fed is forced to tighten. He recommends shorting the AUD, and sees the commodity super-cycle as over, because, "supply-demand... is deadly." He also likes Google but not "tech companies that engage in financial engineering under advice of hedge fund managers."

The euro continues to not get the memo. After days and days of attempted jawboning by Draghi and his marry FX trading men, doing all they can to push the euro down, cutting interest rates and even threatening to use the nuclear option and push the deposit rate into the red, someone continues to buy EURs (coughjapancough) or, worse, generate major short squeezes such as during today's event deficient trading session, when after France reported a miss in both its manufacturing and industrial production numbers (-1.0% and -0.9%, on expectations of -0.5% and -0.3%, from priors of 0.8% and 0.7%) did absolutely nothing for the EUR pairs, it was up to Germany to put an end to the party, and announce March factory orders which beat expectations of a -0.5% solidly, and remained unchanged at 2.2%, the same as in February. And since the current regime is one in which Germany is happy and beggaring its neighbors's exports (France) with a stronger EUR, Merkel will be delighted with the outcome while all other European exporters will once again come back to Draghi and demand more jawboning, which they will certainly get. Expect more headlines out of the ECB cautioning that the EUR is still too high.

An overview of this week's drivers.

A look at the price action in the foreign exchange market and the technical forces in the week ahead.  

FX market overreacted yesterday to ECB developments. Europe has corrected it and now participants will take a fresh look after the US employment report.

Overview of the price action in foreign exchange and outlook for the week ahead.  

As we have discussed numerous times over the past year, there is a quiet movement among the world's central banks to diversify their reserves away from the pejorative USD. Whether it is direct trade linkages, hording physical precious metals, or simply buying foreign sovereign debt, there is a trend emerging. The latest defection, as BusinessWeek reports, is Australia's plan to invest about 5% of foreign currency reserves in China. The decision "represents the first time that the RBA will have invested directly in a sovereign bond market of an Asian country other than Japan," the country's deputy governor noted, adding that this step was an "important milestone" to "stronger financial linkages" leaving Australia "better positioned to benefit from the shift in global economic growth towards Asia." Of course, palling up to its closest trade partner is a big driver, but in a somewhat barbed comment on the strength of the AUD, Lowe noted, "quantitative easing that has taken place in a number of countries is having a significant effect on exchange rates of freely floating currencies... which is clearly making for difficult conditions in certain parts of the Australian economy."

The resilience of the euro and Australian dollar today, given the heightened rate cut speculation, may be indicative of a reversal of the US dollar's recent fortunes.

If there was any debate about the global economic contraction, driven largely due to pundits confusing manipulated stock market levitation with this anachronistic thing called the "economy" and fundamentals for the fourth year in a row, all doubts were removed after this morning's manufacturing PMI data out of China, which as reported previously was a big disappointment (sending the Composite firmly into the red for the year down 2.57% to 2184.5) only to be followed by just as disappointing manufacturing and services PMI data out of Germany, which tumbled from 49 and 50.9 to 47.9 and 49.2, respectively, missing estimates of 49.and 51. The composite German PMI tumbled to a 6-month low of 48.8 as a result, meaning the European economic deterioration is just getting started, and at the worst possible time for Merkel several months ahead of her reelection campaign. The end result was a miss in the blended Eurozone Mfg PMI, which dropped from 46.8 to 46.5, even as the less relevant Services component eaked out a small gain from 46.4 to 46.6, on the back of a dead cat bounce in French economic indicators. Bottom line: a contraction in both European manufacturing and services for the 15th consecutive month. Some "recovery."

An attempt to look ahead at the drivers of the capital markets in the week ahead.

Is the dollar trending or is it moving broadly sideways?