As Glenn Stevens at the April 5th RBA statement called yet again for a lower AUD/USD, the price dropped from 0.7635 to 0.7486 then in traditional AUD methodology, AUD/USD bolted to recent highs at 0.7828. Current price rests at 0.7806. AUD/CAD likewise dropped from 0.9900 highs to 0.9700 lows then typical AUD/CAD skyrocketed back to 0.9900 highs. EUR/USD sat idle and rangebound to allow AUD/USD and AUD/CAD to perform its price functions. What’s driving AUD are two factors, correlations and the complete overhaul of AUD interest rate markets.
The RBA is extraordinarily late in the revamp of interest rate markets as Europe, Singapore, Malaysia and a long list of central banks not only completed plans but are set to implement interest rate overhauls in respective markets. Overhaul includes either wholesale elimination of interest rate categories such as Europe and adjust interest rate Fixes to volume weighted averages. The Federal Reserve for example implemented volume weighted averages March 1 yet the Fed like the Bank of England lacks ability to overhaul interest rate maturities since the FED and BOE maturities are methodologically set in stone. Set in stone maturities for DXY and GBP means the market oriented character of those currencies remain while the Euro is questionable since European interest rates serve the purpose to fund bank’s market operations. What is known so far regarding AUD is the immediate switch to volume weighted averages, introduction of a risk free interest rate and current maturities remain. The market oriented character of AUD also remains which means AUD price movements prevail.
Why Glenn Stevens lacks ability to drive AUD lower is due to AUD/USD and EUR/USD revolving correlations since January. AUD skyrocketed from 0.7400 lows to 0.7800’s due to minus 98% correlations to EUR/USD. AUD/CAD followed AUD/USD because of positive correlations. Today, EUR/USD, AUD/USD and AUD/CAD are aligned as AUD/USD and EUR/USD share a + 96% correlation, AUD/USD V AUD/CAD + 74% and EUR/USD V AUD/CAD + 69%. Positive correlations means AUD/CAD retains today its traditional role as a risk barometer.
AUD/USD bottoms are found at 0.7411 and 0.7576 then next comes 0.7591, 0.7657, 0.7723 and 0.7741. Current AUD/USD price at 0.7800’s is out of bounds V EUR/USD and AUD/CAD and must fall into range. The strategy is short.
AUD/CAD bottoms are located at 0.9841 and 0.9877. Then next comes 0.9906, 0.9938 and range tops at 0.9971 and 0.9999. Current AUD/CAD price at 0.9885 trades at range tops. The strategy is short with focus on the big break long /short point at 0.9858. The larger range for a longer term view is found above at 1.0015 and 0.9547.
EUR/USD as was seen in other pairs currently trades below its range points. EUR/USD should trade inside 1.1334 – 1.1414 with focus on long/ short point at 1.1374. Despite out of sync range positions, I’m not nor haven’t favored long EUR/USD for many months EUR/USD remains in price adjustment phases from not only the previous eCB cut but past cuts dated to September 2014 when the ECB first went negative interest rates. Topside ranges in EUR/USD both in long and short term averages are compressing however slowly. EUR/USD is heading lower despite a slow, slow grind. I’m more in favor of sell rallies rather than long EUR/USD.
Brian Twomey, Inside the Currency Market, btwomey.com