I have devoted a lot of time recently pointing out that I thought the Australian dollar was about to fall.
Unlike the mainstream media that waits until something has fallen before writing articles about it, I warned on the 25th of April, when the Australian dollar was trading at US$1.03, that:
‘The next stop for the Aussie is of course the last major line of support around US$1.015-1.02. I would expect to see some buying around that level but I don’t think it will be enough to turn things around. If that last line of support gives way then you could expect to see the Aussie heading towards parity in short order.
‘From there the Aussie would be testing parity as well as the lower edge of the symmetrical triangle. If that can’t hold the Australian dollar would run out of friends pretty fast.
Fast forward three weeks and the Aussie is indeed running out of friends fast. Last week I said that:
‘I think we will see the US$1.015 level give way within the next week or so… From where I sit there is a set of dominoes piled up from here to around US$0.98 and it could happen quicker than most expect once it gets going.‘
In the event the Australian dollar broke beneath the US$1.015 level on that very day and we have seen the sharp sell-off that I was predicting unfold over the past week…
In the very short term the currency is starting to look a little overstretched on the downside. We can expect to see some sort of bounce from this region, but it’s by no means certain.
As I said last week (you can find last week’s offering here) the very long term charts are starting to look pretty bearish. The major line in the sand for our currency is the 2008 high of US0.985.
In the short term I would expect to see that level hold, or if it doesn’t hold the currency won’t spend too long beneath it before having a short squeeze higher.
The US$1.015 level should prove to be stiff resistance on the way back up and I don’t think the Aussie dollar will manage to bust back above that level from here.
Looking at the longer term picture I remain of the view that the US$0.985 level will ultimately fail and we’ll see the Aussie dollar plummet to the low 90′s and perhaps even lower.
Japanese Bonds Continue to Sell Off
The continuing collapse in the Japanese Yen and rapid increase in Japanese bond yields is the most interesting development in the markets over the past few months.
From a low yield of around 35bps, after the Kuroda bombshell announcement that they were going to print their way back to prosperity, the JGB’s have sold off sharply to a yield of over 90bps.
The bond market was shut down twice this week due to circuit breakers based on volatility. It escaped being shut down a third time by 1 basis point.
In other words the market is no longer orderly. Investors are trying to get out in droves and there is a chance we could see the volatility increase even further from here.
I wonder how comfortable the government will be once yields start shooting above 1%? To put things in perspective, every 1% rise in bond yields takes another 25% of government revenue. There has to be a few nervous nellies eyeing the bond market and praying that the sell-off is contained.
Now that the US dollar has busted up through the psychologically important 100 level against the Yen there is very little stopping the ongoing collapse in the Yen. I believe you’ll see the US/Yen heading above 105 and towards 110 before long.
The Aussie/Yen has been highly correlated to our stock market due to the prevalence of the carry trade. It’s still very early days but the weakness in the Australian dollar is seeing the Aussie Yen tread water even though the Yen is weak against the US dollar.
Australian Dollar/Yen Daily Chart vs ASX 200
I’ll need to see the Aussie/Yen heading down before I will be more confident in calling our stock market lower. Yesterday’s negative price action in Australian stocks was initiated by a large sell order from a leveraged hedge fund. We could see more selling like this in coming days.
So how will this all play out for stocks?
Looking at the technical picture for our stock market I can see we’re now at a true inflection point. Either our stock market is going to break away from the distribution it has been in for the past four years, or it isn’t. It’s decision time. I think we’re still under the influence of the long term distribution and will fall back inside it before long.
ASX 200 Weekly Chart
You can see from the above chart that the Australian stock market has traded in a pretty tight range for years. The gravity of the point of control at 4,700 is very strong and I would expect to see us revisiting that level at some point.
The first thing I need to see is a close under the 15th March high of 5,163. From there we should see a retest of 5,025-5,040. If the market can’t hold above that level then we’ll be re-entering the major long term range and we could expect to see a pretty quick trip to 4,700.
If we break out above the highs from yesterday and close above that 5,250 level then all bets are off and we could witness a big rally as we break away from the multi-year range.
I think that outcome is a low probability, but as we have learnt over the past year, anything can happen in these crazy money printing times.
Murray Dawes
Editor, Slipstream Trader
Ed Note: It’s one of the biggest dilemmas for any investor – when should you sell your shares? In today’s Money Morning Premium, Kris discusses two methods that investors can use to protect their shares from a falling market, without selling them. Click here to upgrade now.
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