Data Diary

End in sight for AUD selloff?

Posted on 21 May 2010

The mighty Australian dollar has taken a pasting over the last week.  We had been keeping an eye on the AUDYEN cross as a measure of the carry trade (here and here).  Would be reasonable to assume that the unwind is in full swing now – see Bloomberg (here):

In this context, it’s interesting to note then that AUDYEN has outperformed EURYEN over the recovery:

And that AUDUSD, the commodity trade part of the currency, has plenty of room left on the downside:

Suggests that the AUD index has further downside if fears of a China slowdown follow this bout of risk aversion.  This is a material probability – given time.

AUDYEN has come a long way very quickly.  It is now back to levels it tarried at back in July 2009 when the equities market undertook its infamous head (and shoulders) fake out. If AUDYEN were to break-through ~70, there isn’t much to stop it seeking out a retest of the March 2009 lows.  That would not be good – but by the same token it would require risk markets to embrace the same broad level of fear that prevailed at that time.  We are not there.

It’s a brave man that stands in front of the proverbial freight train. So, notwithstanding that from an equities perspective we are heading into our value zone (see here for the end of the thread), think we’ll be treading cautiously back into the market.  There is no need for haste with the bulls growing bushy tails.