Do you have any Pound Trades Running?

The Bank of England is going to rattle the cages of the Pound today at 10.00pm AEST so be aware if you have any Pound trades running.

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RBA leaves the cash rate unchanged as AUD climbs 1c.

The RBA once again confirmed that it would be leaving the official cash rate of 2.5% on hold for the foreseeable future but the AUDUSD has rallied one cent since its low on Saturday morning after the US unemployment report. Why?

The reason the AUDUSD has rallied is twofold. Firstly there was an overwhelming number of traders short on the AUDUSD on Friday and this created an oversold scenario. Secondly the USD has been bought heavily in the past couple of months and an overbought position was created. Simply put the AUD has not risen because of anything the RBA has said or done. The AUD has risen simply because traders who were short AUD locked in profit and traders that were long USD also locked in profit. Thus pushing the USD Dollar down and Aussie Dollar up.

The RBA reiterated that the AUD is still too high. In fact it said the following about our economy at large which clearly points to a lower AUD longer term and does not give any indication that the RBA sees the economy picking up in the next 6 to 9 months.

• Resources sector investment spending is starting to decline significantly, while some other areas of private demand are seeing expansion, at varying rates.
• Overall, the Bank still expects growth to be a little below trend for the next several quarters.
• The labour market has a degree of spare capacity and it will probably be some time yet before unemployment declines consistently.
• Growth in wages has declined noticeably and is expected to remain relatively modest over the period ahead.
• The exchange rate has declined recently, in large part reflecting the strengthening US dollar, but remains high by historical standards, particularly given the further declines in key commodity prices in recent months. It is offering less assistance than would normally be expected in achieving balanced growth in the economy.
• On present indications, the most prudent course is likely to be a period of stability in interest rates.

There is nothing in this report to give reason to buy the AUD.

When the AUD dropped after the US unemployment report Friday it reached the previous low of the 1st September, which also happened to be the 2014 yearly low created on the 24th January. Traders began to exit those short positions and bank profit. We were some of those traders.

Andrew Barnett is the Senior Trader at LTG GoldRock and provides guidance each day to over 4,000 LTG GoldRock members. To learn more go to www.ltggoldrock.com

 

US Jobs report to be eyed today.

The first Friday of every month sees the market get the official US Non-Farm Payrolls Report which is essentially the US employment figures. Why is this economic data announcement viewed as so important? It is because the US Federal Reserve set a benchmark some years ago (post the GFC) that US job creation was going to be its gauge to when it would raise interest rates.

Currently the US has an unemployment rate of 6.1% however the participation rate has substantially fallen since the GFC and job creation per month is what the US Fed wants to see and an increase in the number of people looking for work. The market will be satisfied if the US jobs report today is over 215,000 as the market is expecting 215,000. A private ADP jobs report for September showed the US created 213,000 jobs and whilst this report is not accurate every month it’s generally a good gauge over the long term.

Last month the US created only 142,000 jobs and I think this figure has a good chance of being revised upward and if the September figures beats estimates of 215,000 and the August figure is revised up closer to 200,000 then the US Dollar is likely to rally strongly immediately after the figures are announced. It all happens at 10.30pm AEST today.

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It’s official. The RBNZ was selling its own currency.

The RBNZ announced yesterday that in the month of August it was an active seller of its own currency to the tune of more than half a billion dollars and this was the largest intervention made by the RBNZ in 7 years. The Kiwi Dollar weakened on the news but what sent it 1 cent lower within an hour was when New Zealand Prime Minister John Key spoke to the press. Mr Key a former large currency trader himself said the following to the press on Monday.

"I happen to actually support the view that the Governor has that the exchange rate is overvalued, so if they have intervened, it would be a matter for them, but it would seem fairly logical, I think at the level we’re at, [US]78 odd cents, we’re still at very high levels. In the end, the Goldilocks rate, not too high, not too low, just about right, I don’t know, [US]65 cents maybe, certainly ... lower than it is today.  Just because I think that’s the rate that works for exporters doesn’t mean it’s the rate it’s going to get to."

The RBNZ sold in August $521 Million of its Kiwi Dollar holdings but what is interesting is the fact that in the month that it did sell its own currency the Kiwi Dollar only dropped by 2c. The following month of September the Kiwi Dollar has dropped 6c. The intervention and comments made by the RBNZ simply goes to show that if you want to trade against a Central Banks views and intentions then you are likely going to be on the losing side of the market more often than not.

They are jumping off the Aussie & Kiwi Dollars like a burning shipwreck.

The Aussie Dollar, Aussie Bonds and the Aussie share market has been offering investors solid returns for a number of years now. International investors who live in countries that have extremely low interest rates have been enjoying investing in Australia and New Zealand where they have been able to achieve higher returns on investment and do it relatively safely and securely. For example buying the AUD is a positive carry trade of 2.5% annually, buying 10 Year Australian Bonds delivers around 2.5% to 3.5% annually depending on the type of Bond you buy and many blue chip shares in both countries have been delivering similar or better dividends. Hence when international money comes into our financial markets to buy these products it not only helps support bond and stock markets it also helps support the AUD and NZD simply due to the fact you need to pay for your purchases in Aussie or Kiwi Dollars.

But recently we have seen the tell-tale signs that many of these investors are bailing out of Australia and New Zealand and the reason why is very simple. If you buy a bond, invest in Aussie or Kiwi Dollars or are relying on a dividend from the share market, the price you pay for that investment is important. If it falls in value beyond what your dividend is going to be annually you are losing money. And that is exactly what is happening to many international investors who have bought the AUD or NZD, Aussie or Kiwi Bonds and Aussie or Kiwi Shares.

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