Aussie Sparks Interest As Northern Markets Hit Snooze Button

Yawn! What is it going to take to wake up our forex markets? The Euro just posted a daily traded range of 19 pips, the first time below 20 in eons. Brokers and traders alike are considering career changes. Speculators are already distorting market pricing, if the NZD/USD is any indication. The central bankers from the “Land of the long white cloud” summoned up some courage and raised their interest rate by 0.25%. The Kiwi quickly fell in active trading, the opposite of what most anyone expected, but speculation, as the current argument goes, had already priced in the change. Sell on the news was the market’s knee-jerk reaction.

Profit margins, if there are any at this juncture, are paper-thin. It is time to be cautious of the types of games that proliferate the forex landscape when times are tough. Big money will try to jerk market pricing one way or another, if only to clean up on stop-loss orders that have been conveniently been placed 25-30 pips within market pricing. The same scavengers will try to create a trend where there is none, if only to grab positions on the cheap and then to let the real market forces rush back to destroy the vacuum. Greed may make the world go round, but it can be very unpleasant at times.

So where does one go to find a sane market these days? Australia and Asia tend to be the destinations of choice when the rest of the market seems to have lost its way. The AUD/USD has been bumping up against some heavy resistance of late, but it has not wavered from the fight. Like a two-fisted brawler from its earlier wild-west days, it has continued to fight against conventional wisdom, even when everyone believes the challenge to be too great. The chart below tells this story:

It is easy to name the phases, three to be exact, for the Aussie over the past year. When China decelerated, the Aussie quickly followed suit. When China put its foot down on the accelerator, then Australia responded in kind, but the latest stall within a tightly traded range is driven by a general slowdown in all markets and a grudging acceptance that the new paradigm may be slow global growth for some time.

But something happened on the way to the forex forum. CPI data out of Australia this week reported a year-over-year growth rate of 3%. BAM! The Aussie assaulted the ramparts once more. Mario Draghi might consider a boondoggle down under to discover what it takes to muster inflation, since Europe cannot seem to find the magic formula. Next up was HSBC to announce its preliminary PMI data for China, a 52% figure, its highest mark since January of 2013 and an indication that Chinese factories might actually be expanding their efforts. BAM! The Aussie was boosted again.

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As always, the question now is what’s next? Can the Aussie accelerate again and blow past $0.95? Is parity with the greenback really in the cards? The Kumo Cloud seems ready to launch, and the Stochastics indicator is rising, barely above middle ground at this stage. Is the RBA still trying to talk the Aussie down and bow to political pressure? Surprisingly, the members of the RBA have suddenly become tightlipped, shying away from any mention of the strength of the local currency in their respective speaking engagements.

So what do we believe? At this juncture, one would expect the Aussie to set a new high for 2014 by cruising right on through the $0.95 threshold, but when it gets to the other side, beware of speculator games.