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Summary

  • Despite better-than-expected data, the RBA is unwilling to raise rates.
  • Fiscal policies in the 2015 budget also dictate a weakening Australian dollar.
  • Technical Analysis of AUDUSD show bearish divergence. Thus, AUDUSD is expected to decline to 0.92 over the next three months.

The morning commute is one of the most integral processes to my work day. The journey is spent not only focusing on the road, but mentally preparing for the activities of the day. Such activities include listening to earnings calls, reading economic releases as well as analyzing fundamental & technical data as well as forecasts. One of these activities came to mind while I was approaching traffic and I said to myself "This requires RBA patience." While at the beginning of my morning journey there was no traffic and I thought I had clear asphalt to the office, there was traffic on the horizon and patience was required for the remainder of the commute.

Similarly, despite the better-than-expected GDP results for the first quarter of 2014, the RBA remains placid, keeping its cash rate at historic lows. As such, the rally seen in the first quarter of 2014 in the Australian dollar versus the US dollar seems unsustainable. To take advantage of this, investors should consider rebalancing their exposures to Australian denominated assets or take a short position in (NYSEARCA:FXA) over the next three months as AUDUSD approaches 0.92, a 2% decline from current levels.

Fundamentals

Australian GDP spent five of the last 7 quarters below its four-quarter moving average, with only the last two quarters showing signs of upward momentum. Latest figures show that Australian GDP in the first quarter of 2014 grew by 3.5% year-over-year, considerably above the 2.1% GDP growth of the first quarter of 2013. The chart below shows Australian GDP over the past 5 years.

Chart 1 Australian GDP Growth Mar-09 to Mar-14

(click to enlarge)

Source: Bloomberg

The momentum in GDP was as a result of surging exports and homebuilding. While this seems promising, Australia's trading partner, China, is growing below target. There is also a potential peak in Australian housing prices. As such, a deceleration in upward momentum is a likely outcome. Recent data shows that first quarter 2014 Chinese GDP year-over-year did not meet the target of 7.5% by ten basis points. This below trend pace is expected to continue as Chinese authorities are refraining from large stimulus measures and focusing on reforms. The chart below shows Chinese GDP growth.

Chart 2 Chinese GDP Growth Mar-09 to Mar-14

(click to enlarge)

Source: Bloomberg

Also, the Australian housing market appears to be nearing a cyclical peak. The key "time to buy a house index" has been in a steady decline since the peak in September 2013. The index is usually positively correlated to shifts in interest rates, with leverage being a major factor. The chart below shows housing affordability and the time to buy a house index.

Chart 3 Australian Housing Affordability & time to buy a house index

Furthermore, building approvals are peaking. The chart below shows building approvals along with the cash rate.

Chart 4 Building Approvals Cycle and the Cash Rate

Considering the main drivers of the Australian economy for the first quarter of 2014 were exports and homebuilding, it is unlikely that the RBA will raise rates. The RBA is expected to be patient, waiting for more core drivers of growth to resume before tightening. Furthermore, with the fiscal 2015 budget showing reductions in welfare entitlements as well as cuts to federal government programs and its workforce, and a temporary income tax rise for high-income earners, a cash rate increase seems unlikely. Thus, bearish moves for the Australian dollar are expected.

Technicals

The harami pattern for the period January 24th to 27th, 2014 signaled the reversal on AUDUSD. The breaking of the downward trend line was also a bullish signal. The first quarter 2014 rally in AUDUSD continued with some channeling, then a daily high was made of 0.9463 on April 10th. From there, the channeling changed. A downward channel followed with AUDUSD appearing to make a corrective move higher in the downward trend channel near the resistance line around the 0.94 level. The chart below shows the daily chart of the Australian dollar.

Chart 5 Daily Chart of AUDUSD

(click to enlarge)

When I look at my customized-period momentum indicators on the four-hour chart, bearish divergence is seen on the Williams %R as well as the MACD. The chart below illustrates this.

Chart 6 Four-Hour Chart of AUDUSD

(click to enlarge)

Conclusion

While the journey for AUDUSD appears to be clear, there is some oncoming traffic as the Australian economy may lose some momentum into the remainder of the year, making the RBA unwilling to raise its benchmark rate.

Source: Oncoming Traffic For The Australian Dollar: A 3-Month Outlook