A critical time for Aussie bulls

Since falling below parity for a few days in the middle of last month, Aussie bulls have had all the running, with the AUD reaching a high of 1.0450 earlier this week. Critical for those who have a bullish disposition on the currency, it has tried to sustain a move through the 200 day moving average on a number of occasions in recent days, but has failed to do so. Should the Aussie be unable to penetrate the low 1.04 area convincingly in the near term, then those with long positions ought to be concerned.

Last night’s employment figures did the bulls no favours, with payrolls down for a second straight month in December. In 2011, there was essentially no employment growth for the whole year. After reducing the official cash rate twice at the end of 2011, there is a strong probability that RBA Governor Stevens will sanction a further rate cut when the Board next meets on February 7th. More than 100bp of cash rate cuts are priced in for this year. With the slowing global economy weighing on export demand, consumers are extremely reluctant to spend, jobs are hard to come by and property prices are falling; it is a much more challenging environment for the currency. Traders are quite long again and sovereign wealth funds have been keen buyers over recent weeks. If the euro experiences a sustained short-covering rally (recall that trader short positions are at a record high), then we may see the Aussie underperform. AUD/EUR for instance seems to be turning over.

Perhaps the smart money is already adopting a much more considered perspective on the Aussie.