Ralph Shell @ 1:05 PM, Wednesday April 21 2010
Early week chatter from the pundits that the A$ bull party was over was summarily dismissed by futures participants yesterday. The market opened at 92.37 and steadily advanced closing near the high at 93.16. Open interest in the futures market went up 16,418 contracts or almost 11% in one day. Granted this was a day when the interest in all currency futures was expanding, up 43,876 contracts for pound, C$, euro, yen, and SF in addition, but the A$ had the biggest increase.
Recent weakness in the A$ seemed the consequence of Chinese efforts to contain their economies expansion, and fear that appreciation in the yuan would slow Chinese interest for Australian raw materials. With Chinese auto sales headed for 17M units this year, a diminution in demand for raw materials seems improbable. In fact, Australian Bank Governor Stevens cited the 50% increase in this year's spot price of iron ore is one reason future inflation is feared and rates will further increase.
China is not the only growth story in that quadrant of the world. Korea, Singapore, Malaysia and others are all success stories leading to expanded trade. It is no wonder that Pimco, the world's large bond fund expressed a preference for emerging market debt rather than the abundant sovereign debt in developed countries. For some investors the 5.85 yield on an Aussie then year note looks very attractive the current 3.75% on the US note or the 1.34% return in Japan.
Speculator interest in the C$ revived also yesterday after a several days of weakness in crude and equities chased some of the nervous bulls out of the market. Open interest in the C$ was up 13,738 contracts. Yesterday the Bank of Canada hinted the anticipated rate increase was coming quicker than the anticipated July date. Fearing future inflation was cited as the reason, but why they are ignoring the current real estate bubble remains a mystery. Perhaps fear that the manufacturing sector will suffer if the C$ trades at a premium to the USD but rate increases seem assured.
Both the A and C$ are taking a breather today. Trader fear the never ending Greek saga will spread Portugal and or Spain, continues to pressure the euro. Greek 10 year paper traded above 8% today. How long can that last? The IBEX 35 Spanish stock index was down over 2% today, so the negative psychology in Europe is spreading. In this context, we wonder if some central bank reserves are being moved to Australia and Canada in addition to the USD? We would use a pull back into the .9230 to buy the A$ or the 100.40 level to try the long side of the C$ versus the USD.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.