Thank you for the link of the Druckenmiller story, I only had read about it on Bloomberg and it was pretty vague. The timing of the story and the fall in the Aussie is pretty impressive though. I mean the commodity bull cycle end didn’t happen last week but Aussie losses have accelerated just as the the story was coming out. Maybe many were not expecting the RBA to cut rates again so soon.
Grkfx, you wrote:
“I do think a significant portion of the EUR/USD and GBP/USD collapse was on the back of the USD/JPY rally, which would make me hesitant to short EUR/USD or GBP/USD aggressively.”
This is exactly what I had in mind, in fact I was thinking to go long G/U last week but I decided not to because of the political jittering going on with the EU referendum talk..
Also you wrote:
“When I say a trade “doesn’t feel right”, it is just my way of saying that it looks unattractive, either from a win rate and reward risk ratio standpoint, or from a easy money, vs difficult money standpoint, etc. So from the EUR/AUD and GBP/AUD, it didn’t feel right to me because I didn’t expect that much AUD centric weakness, and I expected the weak EUR and GBP economies to cap any rallies. So even if the EUR/AUD or GBP/AUD did go up, it would do so in a choppy way (difficult money). Don’t get me wrong, the chart looks really good for an upside breakout. And if you bought some of the dips in EUR/AUD intraday you could of made some money, but I am trying to look for more cleaner moves.”
I see what you meant now. Just to let you know your easy money vs difficult money concept has helped me enormously, I remind myself this one every day, it is my favorite of all your concepts thought in the course, very simple but so logical and powerful, thank you Grkfx.
Again you wrote:
“The RBA has already cut interest rates gradually over the course of the past 1.5 years, since the end of 2011. The market has time to pare back any excessive long AUD positions. Also the AUD/USD has been stuck in a big 0.97 – 1.07 range, giving the market plenty of time to adjust any excessive carry positions. So I do not see any excessive AUD long positions that could be unwounded.”
Of course you could be right, but I do think that the market is very long Aussie especially on the crosses but I have no way to prove it though. My reasoning is that being the only major currency left with a high interest rate, it leaves no other choice to anyone looking to carry even after last year’s rate cuts. Plus GBP/AUD made a new low this year and many may have pilled in the AUD/JPY as well… Maybe some longer term investors / funds like Japanese pension funds are still heavily long the Aussie on the crosses?
Now, I may be deviating too much here but on top of Druckenmiller’s call for the end of the commodity boom, I do see some serious deflationary risks around and this should weight on the Aussie. Now I’m thinking that the UK have been stuck with a sticky inflation problem dampening growth prospects, so if those deflationary risks materialize it could hurt Australia while acting as some sort of a relief for the UK, thus another reason to see the GBP/AUD go much much higher… You see, some commodity deflation helping the UK to get rid of its sticky inflation problem without prompting the BOE to ease further while the RBA continues on its easing cylcle…. Now how Carney sees things is what matters in the end though but definitely a possible scenario to keep in mind…
I think CAD could also come under pressure too at some point and this is why I was asking if USD/CAD could be caught short volatility at some point… Because I think the new Governor might come out dovish, remove the next move is a rate hike bias, and even cut rates at some point… So I’m looking forward to his first speeches as Governor of the Central Bank. I have many reasons to expect this…
I too was a bit confused about the commodity bull cycle comments. I knew that it ended a while back. Perhaps they were looking at some commodity price charts that I was not aware off. I usually don’t dig that deep into the minutiae of the country’s economy.
Perhaps part of the fall was due to the perception that the AUD was going to cut rates a few times to try to weaken the AUD. They were complaining about the AUD for a while, but perhaps they heightened their rhetoric slightly and wanted to signal to the market that they were willing to cut rates in a direct attempt to weaken the AUD.
I was also not expecting such a large dollar rally in the EUR/USD and GBP/USD just based on the perception that the Fed will taper QE by a little bit. Firstly, with some of the economic data that came out, I believe they may decide to wait on tapering a bit. And even if they did taper, is reducing the QE by 10 bln or so, really going to cause that big of a dollar rally? So I was a bit confused there.
Although with some of the comments from the Fed officials today, I think the dollar can start to weaken again as the Fed may continue to max QE for a while, and in the rare case, they will increase QE. Which would be really insane since the stock market is already at a high level, that could cause even more upside volatility in the stock markets and cause people to pile in further. Energy prices are well contained so far, giving consumers more money to spend, which is also helping keep the equity rally sustained.
Easy money vs difficult money. The ODVE, MDMM and GM moves. The current volatility vs near future volatility. Good reward risk ratio. Those concepts are all very closely related.
The CAD can possibly come under pressure. After all, it is a commodity currency like the AUD and NZD. And the high Canadian Dollar has been having a dampening effect in Canada. And the USD/CAD has not really broken out yet. So I could see the CAD coming under pressure. The question is what will be the catalyst. The AUD had a partial catalyst with the rate cut. The NZD had a partial catalyst with the RBNZ intervention. So, if the CAD can just get some sort of bearish catalyst, it could break out. I haven’t yet analyzed the new incoming BoC governor, so I cannot say yet.
The deflation / lower inflation situation is coming into play in many countries. US inflation numbers came in lower. Eurozone inflation numbers are very low. UK inflation just came out weaker than expected. So it will be interesting to see if/how the central banks respond to it.
Also, in regard to the AUD carry trade. I believe the carry trade participants in the market are not currently as strong as they used to be. The reason is that there are huge moves going on in other markets, so the market participants aren’t really looking for yield. They are hunting for growth now and capital appreciation. For example the huge USD/JPY rally. It wasn’t caused because people want the carry interest with it. It was caused because they expected a big move to happen and thought they would make a big capital gain on the trade/investment. Similarly, equities aren’t rising because of big dividend yields, etc. They are rising because people expect growth and capital appreciation and capital gains to be fairly substantial.