Thank you for your reply and nice quotes from Inside the House of Money. To me, economic data on growth, inflation, etc. will have a lasting impact on a currency only if they cause a change in how market participants view the central bank monetary policy, otherwise it will fizzle out after an hour, a day or two depending on the data. A good example of it was the Australian Employment report this week. It was not enough to change the market’s perception that more cuts are coming from the RBA this year.
I was glad to see the Aussie fall against the CAD, Cable and the Euro but it did not happen the way I was expecting it! I did not think the A/U would fall that much, instead, I thought that CAD, Cable and the Euro would remain well bid against the dollar while the Aussie would fall some more but never that much! I must admit I did not see all that dollar strength coming and I’ m still puzzled to explain what has happened… I thought there was a consensus in the market that the FED is on hold at max QE with the tapering talks well dead for a while, so this with the risk on boom in stocks combine with better data in the UK (and in Europe too to some extent except for lower inflation) was telling me the $ would remain well offered. It did until the dollar yen rally started on Thursday.
Could most of the $ rally against Cable and the Euro be on the back of the dollar yen rally? The chart does seem to say so but how does it work? (I understand that if a lot of dollar yen buying occur it makes the dollar well bid across the board just like when Japan intervened in 2011 but this much?)
Or is it because the better NFP and Claims number were enough to get the Fed QE tapering expectations going again? I would think that the market needs to see more good data to offset for at least 2 months of weak data…
About Soros/Druckenmiller selling the AUD, I read an article about that in Bloomberg but was frustrated as no reason was given for the bearish call, just that AUD would fall a lot… Since those guys play big they must have the timing right. So I’m thinking that they had very good reasons to expect a cut while the rest of the market was only about 50/50 on a cut giving them more bang for their money as it was not fully priced in?
If I can ask, what is it about the EUR/AUD and the GBP/AUD that doesn’t feel right? I’m thinking that those two could be at the start of a very long uptrend. The chart, yes the chart certainly says so!! Seriously, the interest rate gap shrinking should be a good enough reason in itself as those carry trades unwinding? Of course there is the China story slow-down, the mining peak and the fact that capital inflows could reverse as the RBA cuts interest rates
I thought the Fed was going to max QE for a few more months. But the market decided for a week or so to ramp up their expectations for some removal of the Fed QE. Part of it may have been the good US data, part of it may have been the big USD/JPY breakout. 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.
As for Druckenmiller, he did give his reasons why he thought the AUD would fall:
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 have made some money, but I am trying to look for more cleaner moves. So unless there is some catalyst either AUD specific or EUR specific that can accelerate the uptrend, then I want to refrain from trying to buy EUR/AUD. That is all that I meant.
There are different things that can happen. An AUD specific catalyst could be another rate cut, RBA talking down the AUD and not being satisfied with the current AUD drop, more bad AUD econ data or bad China data which highlights the slowdown between Asia and North America. The EUR specific catalyst could be reversal of the negative rate expectations, better German data, etc. So there definitely exist possibilities.
The interest rate disparity shrinking alone is not enough. This is my reasoning why:
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. Also the environment is still one of risk appetite, and the interest rate on the AUD is still high, so there are still some bargain hunters willing to buy AUD on any big drops. It may not be enough to cause a rally in the AUD, but it can be enough to slow its descent, so it is more gradual and choppy as opposed to any big global macro moves of 1,000 + pips.