Monday October 5, 2009 - 17:48:37 GMT
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Black Swan Capital - www.blackswantrading.com
Aussie vs. Oil: A divergence indeed!
â€˘ Plans to restructure the global economy faced a reality check on Monday when the head of the European Central Bank flatly rejected the idea that the euro should rise against the dollar to cut trade imbalances. (Reuters)
â€˘ U.S. service industries expanded in September for the first time in a year as the emerging recovery spread from housing and factories to the broader economy. (Bloomberg)
â€śWhile financial markets keep feasting on the global liquidity glut, there is a subtle but undeniable shift underway in the central bank community towards eyeing not only the end of easing, but the beginning of tightening. To be sure, our central bank watchers expect the Fed, the ECB and the Bank of England to start nudging rates higher only from around the middle of next year, and the Bank of Japan to even ease policy further. However, several other G10 and emerging market central banks look set to tighten policy over the next 3-6 months, and it appears likely that the rhetoric from those who will remain on hold over that period becomes gradually more hawkish (less dovish). This combination of action by some and talk by others may well challenge the prevailing post-Jackson Hole and post-G20 consensus that rates in the major economies will remain low for longer.â€ť
FX Trading â€“ Aussie vs. Oil: A divergence indeed!
Buy the rumor sell the news? The Australian dollar is sharply higher again today against the buckâ€”which is taking on the chin once again. Traders are jumping all over the expectation (rumor) that Australiaâ€™s central bankâ€”the Reserve Bank of Australiaâ€”is going to hike interest rates by 25 basis points when they meet tomorrow. That will put the RBA cash rate at 3.25%, towering over the rest of the major currency central bank rates. Adding to the chart is the fact that Australiaâ€™s economy seems to be growing faster than its major competitors too. But, there is an interesting divergence developing between Aussie growth expectations and oil pricesâ€”the AUDUSD and Oil price series were tightly correlated till recentlyâ€”what does it mean? [Chart not available in text format.]
1) It may not mean anything. Correlations change. No directional probability can be discerned from the supposed past correlation.
2) It may mean the Aussie is so attractive based on growth (thanks to its neighbor China) and yield that itâ€™s natural for this series to diverge, especially given that oil demand may be subdued because US and Europe are positioned for a low- growth recovery at best.
3) It may mean the Aussie dollar is way ahead of itself and due for a major correction as oil prices are telling us recovery ainâ€™t all itâ€™s cracked up to be; if China were really blowing and going oil prices would be higher; and a decline in liquidity at the margin as the central banks rein in some of the massive liquidity pool could have financial market consequences.
At the moment, the consensus choice we think is Number 2 aboveâ€”attractive on growth and yield. We could find out soon.
Black Swan Capital LLC
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