11-22-2017: December Australian Dollar: No Yield, No Rise

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Point & Figure

Internal Progrm
Third System

Historic Range

Random Chart
Calend Spread

Level Table
Other Factors

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One can find a whole gamut of prognosticators on what the Australian Dollar will do next over the following two years. The range of predictions is from 0.80 to 0.65 Australian versus U.S. D ollars. The case for 0.80 appears to us to be a bit weaker than the case for 0.65. It seems a matter of "sentiment" versis facts. but the Australian Dollar's former position as a "high yielding currency" is definitely no more. If sentiment is based upon past history, facts would seem to be likely to win out as it's all about yield. Employment figures in Australia, commodity prices, and all sorts of toher economic data figure in to some degree on exchange rates, but the general consensus is that the Reserve Bank of Australia's position on interest rates remains the key governing factor. That would suggest Australia is moving opposite to most other central banks, decreasing its currency exchange rate over the next year or so.

Our system has generated one of the highest negative scores in the Decision Matrix for any commodity in recent memory. When everyone is on one side of a trade, watch out! Still, the fundamentals for most currency trades tend to cause prices to move in long unbroken trende cycles with a pretty good indication that the Australian Dollar will continue to head lower. Many cite that it is above "fair value." Also, do not look for correlation with Canadian Dollar movements for that commodity-based economy, as circumstances are not comparable and the Bank of Canada if far more likely to start raising interest rates in the near future as are most other central banks, as opposed to the Reserve Bank of Australia.

Intermarket Analysis

We fed Kansas wheat, Chicago wheat, and soybeans into a neural network to get the following result:

Parabolic Chart

December Australian Dollar:

Parabolic Chart

Nirvana Chart

December Australian Dollar:

Initial Chart

News Analysis

Global financial services provider "UniCredit" conducted its analysis resulting in the conclusion that the Australian Dollar (AUD) is well above fair value, a level that would be expected to be based upon current economic and financial conditions. UniCredit thinks it is overvalued by 11%. At the same time, it believes the AUD will not likely fall bacvk towards fair-value until 2019 at the earliest. It considers the Australian Dollar a "commodity dollar" (economy based upon agricultural, mining, oil, etc.) which are expected to enjoy a good 2018 external environment, supportive to commodity prices throughout 2018. Australia's top foreign currency earners are iron ore and coal. Both are expected to remain supported by Chinese demand in 2018. Australia' s labor market is also seen as being in relatively good shape. But significant advances for the AUD are unlikely as the Reserve Bank of Australia (RBA) is reluctant to raise interest rates because wage growth is slow and households heavily indebted. Increased interest rates could make loan repayments increasingly unaffordable. Rising interest raters could thus make the already expensive AUD even more expensive. The RBA has already flagged its resistance to joining other central banks in normalizing interest rates. The market pricing of the AUD implies there is a 60% probability of a rate rise in the next 12 months and a 90% chance of two rate rises in the next 24 months.

However, ensuring the AUD won't fall back to fair value any time soon is the observation that the U.S. Doillar is also overvalued at +5.0% on a trade-weighted basis (meaning against a basket of its most heavily-traded counterparts.) UniCredit believes the U.S. Dollar is cyclical as the Dollar shows a consistent pattern of peaking and rolling over at this stage in the Federal Reserve's tightening cycle. UniCredit does not believe the Dollar will find any benefit from President Trump's attempts to lower taxes in the U.S. It believes tax cuts should produce a modest temporary boost to growth but will not fundamentally alter the long-term trajectory of the economy. Tax cuts could, in fact, over time weaken the U.S. Dollar by weakening its fiscal position. So UniCredit's outlook is for the AUD to be at 0.8200 U.S. Dollars by the end of 2018, but fall back to 0.7900 in 2019 as the U.S. Dollar's period of correction ends and the AUD commences its own period of correction.

State Street Global Advisors also sees a scenario similar to UniCredit, except it sees an earlier fall in the AUD in the next six months or so.

The RBA says it is uncertain when wages will start to grow and boost inflation. The RBA in its latest meeting left the cash rate at a record low of 1.5% in November. Following release of mintes, the AUD fell to its lowest level since June before rebounding slightly.

The Royal Bank of Canada sees the AUD ending 2019 with a 2.0% cash rate. However, it sees little reason for the cash rate to move from 1.5% until early 2019.

Morgan Stanley predicts the other way. It sees the loss of the AUD standing as a high-yielding currency as a prelude to a drop to 67 cents U.S. in 2018 before retreating further to 65 cents in 2019. Morgan Stanley sees the Australian benchmark rate falling below the U.S. benchmark rate in that timer period. While the median estimate among forecasters is 80 cents for next year, Morgan Stanley is the most pessimistic forecaster in a survey of 30 analysts.

In day-to-day trading, the AUD has been undermined by weakness in commodity prices and a lift in U.S. bond yields which acted to boost the U.S. Dollar. The National Australia Bank believes the U.S. Dollar will receive additional support by rewned political uncertainty in Germany. EUR weakness and political disaray in Germany followed Jamaican Coalition discussion failures.
RBA member Catril said he sees 2018 as a first move higher for interest rates there as unlikely.

Most analysts see the U.S. Dollar rallying significantly over teh next quarter or two. This would ome at the expense of the AUD. Even if the RBA hikes rates early in 2018, analysts do not see the hiking to be at the same speed as other central banks such as the U.S. Fed and the Bank of Canada.

Bloomberg News thinks the AUD is headed quickly for 70 cents because Australian bonds extra yield over the U.S. Treasuries is about to vanish. It thinks the Federal Reserve will hike interest rates three times next year while the RBA remains "on hold." Meanwhile, hedge funds are cutting their long positions to 54,261 contracts from 86,204 at the end of August. Still, a net bullish position means their belief is there's greater room for the currency to decline if sentiment weakens.

Swiss investment bank UBS sees a rough 2018 for the U.S. Dollar as the Euro pushes higher. It believes the Euro will out-muscle the U.S. Dollar in terms of rate hikes. A soft inflation picture in Canada and Japan will help the U.S. Dollar strengthen against those currencies.

Australia currently has a weak inflation rate of 1.8%. AMP Capital even believes a rate cut may be on the horizon for the RBA. In the past, people were buying the Australian Doillar along with currencies of emerging markets because emerging markets were doing well. This is no longer the way it is going to work AMP believes because there simply is no yield.

Point & Figure Chart

 92.0I                                                                  T 11/20
     I CME - Dec-17 Australian Dollr ($100K/$.AD)  Cm.=0.03  Lim.= 2.6
     I  XO
     IX XO
     IX  O
     IX  O
     IX  O
     IX  O
     IX  OXO
     IX  OXOX
     IX  OXOXO
     IX  O OXO
     I       O
     I       O
     I       O                                            X
     I       O                                          X XO
     I       OX                                         XOXO
     I       OXO        X                               XOXO
     I       OXO        XO                              XO O
     I       O O      X XO                              X  O
     I         O      XOXO          X             X X X X  O
     I         O    X XOXO          XO        X X XOXOXOX  O
     I         OX   XOXO O        X XO        XOXOXOXOXOX  O
     I         OXOX XOX  O        XOXO    X X XOXOXOXO OX
     I         OXOXOXOX  O        XO O  XOXOXOX  O OX  OX
     I         O OXO OX  O        X  OX XOXOXO     OX  O
     I           O   O   O        X  OXOXOXOX      OX
     I                   O        X  OXOXO O       OX
     I                   O  X X   X  OX            O
     I                   O  XOXO  X  O
     I                   O  XOXOX X
     I                   OX XOXOXOX
     I                   OXOXO OXO
     I                   OXOX  OX
     I                   OXO   OX
     I                   O     OX
          1111              1111                   1
The above chart is giving a conventional sell signal.

Cyclical and Seasonal Factors

We are headed toward a cyclical low and are in a seasonal down period.

Cyclicals Cyclicals Seasonals

Internal Program

Our best-performing internal program is "Zondr." It is giving a sell signal.

Internal Printout 1 Internal Printout 2

Results of "Zondr" for Australian Dollar (blue lines = successful trades, red, unsuccessful): (Always in the market.)


Third System Confirmation

Our third system has triggered a sell signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)

Third System


The point value is $1,250. Initial margin on a single contract is $1,595. Use of options is advised.

Historic Range

Scale trade buyers are entering the market for the long term in this price range.

Historical Chart

Commitment of Traders

Commitment 1

In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Blue is small speculators. Red is large speculators. Green is commercials. Large speculators with the best track record are getting increasingly-short.

Commitment 2

Interpretation of a Different Site Below (Their trader categories vary from ours):

Commitment 3

Volatility / Probable Range

FB 1 FB 2

The average volatility shown below suggests that a downtrend remains intact from the last volatility low point.

Range/Volatilitiy Chart

Possible Future Prices

Random Chart

Option Recommendation

Our option trade recommendation is to Buy (1) Australian Dollar June 76.5 Call and Sell (1) Australian Dollar June 75.5 Call @ 0.0050 to the sell side or greater.

o 1 o 2 o 3 0 4 o 5

The following is an effort to track previous option trade prices if positions were held indefinitely.

*** It should be understood that some of these trades may have gone through periods where they were very profitable before moving out of the profitable range. This can be tracked by reading the "Option Trade" section of the corresponding article and noting on the option graphics chart shown there the corresponding profit or loss for previous underlying commodity prices. Thus any of the above trades might be or have been profitable if terminated at the right time, underscoring as with all commodity trades the importance of continuous monitoring.

Calendar Spread

What the Dec. - Jun. calendar spread suggests to us is that buying the near contract and selling the far one is at most times not profitable, which we think is a sign that these futures may go down in the long run. The best time to enter or leave the above spread is when it is at -0.10 or narrower selling the far as prices are falling and then buying the near, and exiting or entering when it is at +0.20 or wider buying the far as prices are rising and then selling the near. At this time, we appear to be headed toward the buy the far, sell the near point.

Level Table:

Level Table

The path of least resistance is down.
 82.0|                                                                  R 11/20
 CME - Dec-17 Australian Dollr ($100K/$.AD)  Cm.=0.03  Lim.= 2.6
 71.0|-A-B-C-D-E-F-G-H-J-K-L-M-N-O-P-Q-R-S-T-U-V-W-X-Y-Z----|----|-- TPO= 0.833
       1 1 1                                       1 1 1 1           1
       1 2 2 1 1 2 2 3 3 4 4 5 5 5 6 6 7 7 8 8 9 9 0 0 1 1           1
       2 0 2 0 2 0 1 0 2 0 1 0 1 3 1 2 1 2 1 2 0 2 0 2 0 1           2
       2 6 0 5 0 3 7 6 0 3 8 2 6 1 4 8 3 7 0 4 8 2 6 0 3 7           0

Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary

Here's an intraday chart for a previous day ( 11/20 ).

Intraday Chart

                 Risk Versus Opportunity Report

               ADZ7    December Australian Dollar

                      High Price:  76.5
                   Current Price:  75.44
                       Low Price:  73.31

                            Risk: -0.028
                     Opportunity: -0.057

                    (O/R) Ratio =  2.009

Overall Recommendation

Decision Weighting Factors
FactorsWeighted Points
Inter-Market Analysis - 1
Parabolic Chart - 1
Nirvana Chart - 1
News - 1
Point & Figure - 1
Cyclicals - 1
Seasonals - 1
Internal System 1 - 1
Internal System 2 0
Third System - 1
Historic Range + 1
Commitment of Traders - 1
Range/Volatility - 1
Level Table - 1
Other Factors - 1
Total - 12
Place 9 December Australian Dollar Contracts on a Sell Watch with stoploss @ +2.61 above the get-in point when recent price is represented as "75.81".