Aussie Dollar Volume Versus Price

We knew that the times were extraordinary – but looking at the rapid ascent of the Aussie dollar this week is enough to get one questioning whether something else is going on.

Quickfire movements such as we have seen are uncommon enough events, though the most recent decade seems to have had its fair share. The last time that the Aussie was able to sustain this type of move without at least a reflexive correction was in the 70′s and the world was a very different place then…

Or was it? After Nixon ripped the USD from the last vestiges of gold convertibility in 1971 (some background here), the USD was pummelled relentlessly.

And in real terms

Now we are faced with a similar dynamic. Whatever the why’s and wherefore’s, the USD has few friends. Expectations of its imminent demise are widely held.  Short positions dominate. Ultimately, consensus is its own worst enemy – the weak side becomes the counter-trend trade. But that is what drives a market correction not a change in trend. Looking at history, the USD could have a year or three of heavy weather before the trend is exhausted.

Still with the Aussie overbought, and overvalued by ~40% on PPP measures, we should pay attention to the breadth measures that are suggesting that volume continues to undermine this latest rally.

With the domestic economy having all the buoyancy of overripe cheese, I remain of the view that the AUSDUSD is at risk of a material correction on a global tightening of liquidity (as QE2 fades into the distance and China continues its tightening ways – note there is risk to this view as Japan has kicked it monetary stimulus machine back into gear). If the Aussie signals technical weakness, I expect to add to our short AUDUSD position (here).

For clarity, the short AUDUSD position is part of a portfolio that includes long gold and oil positions (that generally benefit from weakness in the USD).  Also, as an Australian based investor, my equity portfolio is natively long Australian dollars.

Having said all this – it is what it is – a short AUDUSD position. And well out of the money at an exchange rate of 1.09…

3May10 – Added to the short position after the dollar reversed off 1.10. With weakness in copper, gold and equities starting to creep in – there is gathering momentum for a USD rally and risk selloff.

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