Another Non-Confirmation From The U.S. And Australian Dollars

 |  Includes: FXA, UUP
by: Dr. Duru


The U.S. dollar and Australian dollar once again provided useful signals counter a potentially important sell-off in the S&P 500.

Strength in both currencies in the wake of Ukraine-related sell-off signaled a quick reversal.

Australian dollar also gaining momentum on a series of strong economic reports.

The U.S. dollar index (NYSEARCA:UUP) has barely budged from the point in late February when I last discussed the implications of the index's on-going tight trading range. Similar to that point in time, the lack of progress included another subtle signal of non-confirmation of a sell-off in the S&P 500 (NYSEARCA:SPY).

On Friday, February 28th, the U.S. dollar index plunged mostly because of (surprising) excitement over the latest unemployment and inflation numbers from Europe. This happened even with a Russian takeover of Crimea playing out in the background. On Monday, the markets fully reacted to perceived geopolitical risks by taking down the S&P 500. The close downward failed to break the -1% mark, but it seemed ominous anyway because of its close parallels to the sharp yet brief sell-off in late January. Despite the poor start to trading in March, the U.S. dollar index traded higher, reversing roughly half its losses from the previous trading day. This move was effectively a non-confirmation of the sell-off.

The QE3 reference price once again holds as the approximate bottom of the dollar's trading range

On the surface, a U.S. dollar rally seems to make sense as a "safety trade" in the wake of the Ukrainian headline risk. However, the U.S. dollar has not performed well (or consistently) as a safety currency since the euro crisis essentially ended in 2012. In other words, the U.S. dollar mainly behaved as safety against the euro. Last year's two brief rallies in the U.S. dollar index seemed to be more about bets on strong and above trend U.S. economic performance.

Regardless, the continued move higher on the U.S. dollar the next day (Tuesday, March 4th) as the S&P 500 recovered smartly to fresh all-time highs demonstrated yet again that the U.S. dollar trade is not about safety but more about non-confirmation.

The Australian dollar (NYSEARCA:FXA) added its own non-confirmation to the mix yet again. As the stock market sold off on Monday, March 3rd, the Australian dollar held firm against the Japanese yen (NYSEARCA:FXY). AUD/JPY sold off with global markets as the Asian trading session kicked off (Sunday in the U.S.). However, when the U.S. stock market followed through with a sell-off on Monday, AUD/JPY failed to confirm as it held its lows from Sunday. I break down the chart into 30-minute intervals as well as daily to make the dynamics easier to see. Note also that the Japanese yen in general has weakened this week along with increasing strength in the Australian dollar.

A strong week for the Australian dollar; a weak one for the Japanese yen

The Australian dollar versus the Japanese yen fails to confirm the March 3rd sell-off

Source for charts:

Since Monday, the Australian dollar has enjoyed a series of strong economic numbers on GDP, balance of trade, and retail sales. This week's performance has further lifted the Australian dollar, albeit unevenly. Talk of imminent rate hikes are back on the radar even as the tiny odds of a rate cut at the Reserve Bank of Australia's April meeting crept marginally higher this week over last week - from 2% to 6% and back down to 4% as of the time of writing. I hope to cover those prospects in more detail in a later post.

Be careful out there!

Disclosure: I am long SSO with call options (partially hedged with puts). In forex, I am net long the U.S. dollar and long AUD/JPY (net short Australian dollar). I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.