Ralph Shell @ 1:30 PM, Friday January 14 2011
Since the double bottom late last spring, in the A$ at around .81 versus the USD, the currency has made a spectacular move above parity to a high of 1.0253. During this period, the large specs have engorged themselves with a net long of 62,365 futures and delta adjusted option positions, according to the last COT report. Small specs have joined the festivities, and own another 20,618 contracts.
Commodities and commodity related companies and currencies have been in vogue during the past year. Expansion of the money supply, combined with fears of inflation, and strength in the metals markets have supported the move.
As the money has poured into the commodity markets during the past decades, markets have been buoyant. The plethora of index and ETF funds originated during this period, enabled a new group of 'investors' to share in the commodity boom, without fear of getting a delivery or a margin call, always an unpleasant moment for commodity traders. Much of the new commodity money is committed for a period of time, regardless of price. Price action, while it may enhance the speculators statement, it generally alters the supply and demand for the cash commodity.
As a commodity producer, Australia has benefitted from the growth of China and it's neighbors. The economic expansion of China, and construction of the infrastructure has enhanced demand for iron ore, coal and other industrial commodities supplied by Australia. Recently Mother Nature has interfered with the orderly flow of these exports. Torrential rains and subsequent record flooding have inundated Queensland and halted the flow of coal and other exports.
Eventually the water will subside and exports will resume once the coal pits dry and this disaster is squared away. With China making efforts to deflate their economic bubble, however, will demand for the Aussie goods continue with the same intensity?
Today the People's Bank of China hit the brakes on their economy a little harder, raising the reserve requirement of lenders by another half percentage point. This is the second increase since Christmas, but only one of today's changes.
The Chinese real estate boom is not new, but efforts to contain the rate of inflation and deflate the bubble are. There was an interesting note by a Shanghai based research firm Hurun Research Institute who said that the expansion of the Chinese economy last year created 6.1% more Chinese millionaires. This brings the total to 875,000, they claim. We wonder how many are millionaires, because of inflated real estate valuations.
Will the Chinese be able to engineer a soft landing, after the lengthy expansion, and the new millionaires will be able to bank their real estate profits? This seems unlikely. Often mob psychology takes strange twists, and markets go too high, and then too low.
Perhaps the A$ deserves this lofty valuation. Even if the Chinese keep their act together, however, we wonder if that market might not be too loaded with spec longs, and a correction is in order.
in order.
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.