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 Toss a Shrimp on the Barby and Sell Aussie Dollar
by Kevin Pendley
It’s good to be an Aussie. In fact, if I weren’t an American, I’d want to be an Aussie. The Australian economy has enjoyed 16 years of expansion, they make a bunch of decent beers, they have a higher standard of living than any G7 country outside of the United States and they have the 7th largest coastline of any country on the planet.
And that’s just the tip of the iceberg for the good things going on down under! Australia ranks as the 56th most populated country in the world, behind Mozambique and Sri Lanka and just ahead of Madagascar. Despite a small population, Aussies are great athletes. In the 2004 Olympics, Australia ranked 2nd in medals won, with 100 total gold, silver and bronze trinkets (about 100 medals more than Mozambique, Sri Lanka and Madagascar won combined).
There are approximately 21 million Aussies, with a labor force of less than 10 million, which is about the labor force of New York City. Considering how amazing the beaches are in Australia, it’s no wonder more people don’t bother working there. Heck, I worked briefly in Australia and saying it is laidback is an understatement.
OK, now that we’ve got the good news out of the way about Aussie-land, why am I suggesting that the Aussie dollar could be a short-term sell right now in FX? It’s all about chart patterns, and the attractiveness of limited risk. Looking at the attached chart, you can see that the Aussie/U.S. dollar pair sports a potential head-and-shoulders top on daily charts and had a violent bearish rejection of fresh move highs on the recent peak.
These types of patterns make for attractive risk/reward parameters and have nice clean exit strategies if the market doesn’t obey. In this instance, any move to new highs in the Aussie dollar would suggest that the head-and-shoulders top is not playing out, and that the upturn in the Australian dollar has resumed.
Much of the good news part of the argument favoring the Aussie dollar is known. Australia is a major export country and commodity markets have been on fire around the world. They are a major supplier of commodity goods to Japan and China, and the latter is in the midst of one of the greatest economic developments the planet has seen in a very long time. However, there are some that believe that the commodity market has swelled into a bubble that is on the verge of busting. If true, then the Aussie dollar probably would falter in that scenario.
Let it be known that I am not in the commodity bubble camp. Things like massive flooding in the U.S. Midwest and two years of drought in Australian wheat country might be anomalies, but the growth in Asia and demand for physical goods is very much for real, and is nowhere near complete. However, the Aussie economy is beginning to show signs of slowing, with GDP down to 3.8% in the first quarter from 4.3% the previous quarter and the aforementioned chart pattern against the greenback looks top-heavy. That said, I view this trade as riding a short-term correction downward, more than looking for a long-term powerful top.
The Aussie economic calendar picks up steam the next couple of weeks, with the first week in July serving up a policy board meeting by the Reserve Bank of Australia, retail trade data and the international trade report, so the FX market could see the formation of a decent move through those key events.
Updating our current trade recommendations, our short euro/dollar trade remains in positive territory and continues to be a staple theme in our FX outlook. We made money before on short euro/Canada trades, and I still like the setup for declines in that cross looking forward.
FX COLUMN TRADE CONCEPT RECAP
DATE CONCEPT PRICE THEN/NOW PROFIT/LOSS COMMENT
4/24/08 Short euro/dollar entered @ 1.5682 +0.52% stopped out at 1.5600
5/01/08 Short euro/yen entered @ 161.50 +0.12% stopped out at 161.30
5/08/08 Short euro/Canada entered @ 1.5680 +1.46% profit taken @ 1.5450
5/15/08 Short euro/yen entered @ 162.40 -0.36% stopped out at 163.01
5/29/08 Short euro/dollar entered @ 1.5525 -0.55% stopped out at 1.5610
6/10/08 Short euro/dollar entered @ 1.5682 +1.16% stops @ 1.5610
6/19/08 Short Aussie/dollar enter @ 0.9495 n/a stops @ 0.9600
Kevin Pendley has been involved in financial and commodity markets for two decades, including more than 15 years with Knight-Ridder Financial News/BridgeNews. In addition to his work at 4xAdviser.com Weekly, he is a contributor at SmallCapInvestor.com where he writes a weekly technical analysis column on the Russell 2000.
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