Seeking Alpha
, One-Twenty Two (219 clicks)
Long/short equity, event-driven, homebuilders, currencies
Profile| Send Message|
( followers)  

I started this year with a bullish bias on the Australian dollar (NYSEARCA:FXA) with a short-term target set at the 50-day moving average (DMA) (see Australian Dollar Starts The Year With A Bias For Bottoming). The target was not far away, yet the Australian dollar drifted downward for over a week before regaining momentum. That momentum has come in the wake of a U.S. jobs report that disappointed traders and sent interest rates dropping to around a one-month low.

(click to enlarge)

U.S. 10-Year bond yield plummets in the wake of jobs report for December, 2013

Source: Bloomberg

Lower U.S. yields make high-yielders like the Australian dollar relatively more attractive (all else equal). At the time of writing, Asian forex markets have just opened for trading with the Australian dollar continuing its rise. It is now directly challenging the 50DMA target. Since this trendline is moving downward, the Australian dollar has hit the target at a lower point than I originally expected.

(click to enlarge)

The Australian dollar challenges its primary downtrend against the U.S. dollar

Note well that the Australian dollar's strength is not just against the U.S. dollar. It has recently gained momentum against the euro (EUR/AUD) and the pound (GBP/AUD). In keeping with the theme of "joined at the hip" with the Japanese yen, the spike in the Australian dollar as Asian trading opened was matched almost perfectly with a show of strength from the Japanese yen. The end result continues to be a very flat AUD/JPY currency pair.

(click to enlarge)

The Australian dollar and Japanese yen maintain a very tight trading range

Source: FreeStockCharts.com

I continue to think that a break in this tight relationship will be correspond with a major change in financial markets, in particular the stock market (for better or for worse). In the meantime, I think the Australian dollar's gaining strength against the other major currencies is notable on its own and could signal growing expectations for a sustained drop in interest rates.

However, now that the Australian dollar has hit the target, I have significantly scaled back the bullish bias to neutral. Australia is next up to report employment numbers on Wednesday evening. If the unemployment rate deviates significantly from the previous reading of 5.8%, I do expect the Australian dollar to respond sharply and swiftly. Traders will interpret a large change as indicative of the likely bias and/or action for the Reserve Bank of Australia in its next statement on monetary policy (early February). I prefer to wait, watch, and react before establishing the next trading bias.

Be careful out there!

Source: U.S. Jobs Report Pushes Australian Dollar Into Target, Australian Jobs Up Next

Additional disclosure: In forex, I am net neutral on the Australian dollar.