Australian dollar – flows undermining price
Posted on 25 January 2011
Talk round the bundy clock is that hedge funds continue to sidle out of the Australian dollar. The most recent COT reports seems to confirm this:
While leveraged accounts have returned to the AUD after a pre-Christmas sell-off, the declining trend in the size of the positions suggests that conviction is waning in this trade. This same pattern is evident in total open interest that peaked in April-10, failed a retest in October-10, and has more recently turned its skis down the slope:
The importance of the April-10 peak comes through when we look to at the total monthly transaction volume in the Australian dollar (spot and forward contracts):
While total volume in trade in Australian dollars has never regained the peak of October-08, the volume high in May-10 is the most significant recent watermark. The following charts illustrate the trends in volume a little more clearly:
Given volumes have tended to rise over the longer term, we’ve used a Money Flow Index, that weights changes in price by volume, to gauge relative movements over time. Typically, it peaks and troughs with the raw price data – and is used to measure overbought or oversold conditions.
There are two occasions in the data set back to 1990 (shaded in grey) where the oscillator diverges from price. The first had Money Flow peaking around Jun-07, a good twelve months before the AUDTWI followed suit. More recently, while the AUD has been making new highs, volumes have been pulling the Money Index lower after a peak in April-10. It would be uncommon indeed for this divergence to remain unremedied.
Conclusion – Trade in Australian dollars strongly suggests a correction is brewing. We expect the AUD to trade lower, perhaps significantly so, with the odds of a correction rising the closer we get to expiry date of QE2.
9 responses to Australian dollar – flows undermining price
Leave a Response
Click on icon to subscribe
Copyright
DataDiary is published under the Creative Commons license regime
Just wondering what your thoughts are (based on the numbers of course) on the current or upcoming mining boom.
It’s supposed to be bigger than any previous boom Australie has seen, but what sort of effect should we be seeing by now? If a mining boom goes together with demand for (skilled) labour, demand for housing should increase, so house prices should go up. Also, prices of general items should go up as well, also interest rates, that in turn should make the AUD attractive for overseas buyers and investors. The US is not really in recovery mode yet, so AUD should be in favour?
But reading the news lately, there’s no sign at all of these indicators, more the other way around. Does this indicate the expected mining boom is not happening yet? Or does the media want us to believe something else than what is actually happening?
What do your data sources tell us?
Hi Ed,
I’m in the camp that says that the mining boom has passed its prime already. Industrial commodity prices have been driven up by a combination of Chinese demand and, critically, investor demand. To answer the question, I’d suggest exploring data in relation to these two factors – I’ve looked at the financialisation of commodities relatively recently (have a leaf through the ‘Commodity’ category). It’s been a while since I’ve really tried to get inside Chinese demand – it’s not easy and my mandarin is poor (okay non-existent). But you can get a sense from looking at shipping and port data – in addition to PMI and leading indicators…
Broadly the argument goes:
1) Investors buy commodities on the ‘Supercycle’ theory that is based Chinese industrialisation
2) Liquidity from developed world ‘loose money’ floods emerging markets – driving up inflation (in commodities)
3) China more afraid of civil unrest than bad debts at banks, tightens money and constrains capital flows (interest rates rise, lending quotas reduce, the stock market declines)
4) Fears of a hard landing in China develop – imports of industrial metals slow (shipping volumes decline, metal prices ease)
5) Investors exit commodities – the risk is, at an accelerating rate (first watch the futures, then the ETF’s)
6) Australia’s terms of trade tank – and with them, the last crumbs of the 20 year housing boom
Hope that’s all reasonably coherent.
Hi – can you share where you get the data for the AUD open interest, money flows, etc?
I agree with your ideas but would like to view at the data myself…
Sure – AUD open interest from the Commitments of Traders reports, currency transactions and spot rates from the Reserve Bank of Australia website (from their statistics section).
Cheers
Rohan
By the way, condolences to you all down there – not sure where you are based, but I have seen since the middle of December the devastation and have been shocked by its scope, as well as the lack of coverage in major news outlets worldwide….
And thanks. From infernos last year to floods this year – we breed em tough. I’m in Melbourne (the deep south) so we’ve watched it unfold over the tube, but from what I hear it has been pretty extraordinary.
This is a very good blog. I just started reading it few weeks ago. I cannot say I agree with all the views here, but you definitely have a unique perspective for an Australian, which is a credit to you.
My view is that the Commodity Bull Market still has several years to go, according to the Brenner Cycle and we should see a bottom in stocks of the developed world sometime in the middle of this decade. At that point, there should be a total mania in commodities like Precious Metals, Energy and Agriculture.
I currently live in Sydney and also ran a blog: The Short Side Of Long.
Thanks Tiho, appreciate the support. I’ve just added your blog to my RSS feeds, so will follow your thoughts with interest (and look forward to the Commodity report this week).
Cheers
Rohan
[...] The Aussie has burnt through its stores of glycogen and has been battling against the wall for a month or two now – any progress from here is likely to take a whole lot more effort. That’s not to say it can’t make one final push higher. It is to say that the risk/reward is heavily favouring the downside over the balance of the calendar year. (For Jan 25 comment click here) [...]