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2 Items That Stood Out Last Week

  • April 11, 2005
  • Dave Floyd

-  Surprise surge in job
growth down under (Australia) spurred speculation of a rate hike in May despite
the RBA holding rates on Wednesday. 

-  Friday saw light
volume and a surprising drop in the dollar despite inflation concerns earlier in
the week that saw the dollar index re-test the 200-day ema at 85.05

These were the two items that
stood out the most for us last week, and the themes that we feel will provide
some “free looks” in terms of favorable entry points on some trades, most
notably a short in AUD/CAD, GBP/USD as well as NZD/USD.

While the technical breaks in
the DXC and AUD/CAD cannot be ignored, we suspect that at this stage, the DXC
move on Friday was simply a function of low liquidity, hence making price
discovery a bit less scientific/exact.  We would expect a rebound in the dollar
in the early part of this week, but will remain sidelined until the technical
picture becomes a bit clearer.

We feel the dollar will
continue to appreciate given the unique monetary situation worldwide, i.e. the
US is in a period of tightening whereas other G10 countries are either on hold
or looking to cut rates.  Current account deficits aside, this bodes well for
the dollar.  European and Japanese recoveries are fragile which should further
underpin the dollar. 

The dollar will likely
gain ground versus commodity currencies (AUD, CAD and NZD) as overall global
economic growth is slowing.  The CRB Index has failed to close above the 323
level but is within striking distance of 337.60 the high from all the way back
to 1979.  While we recognize this is a call against the general trend in the CRB,
we are not acting on it as of yet, but feel that with a rather “one way” view by
most market players that the rise in commodity prices is a sure bet, a
contrarian viewpoint may serve us quite well as the days and weeks unfold.  Our
belief that AUD/CAD will drop in the weeks to come stems from these two
facts/expectations.

  1. Canada boasts a current
    account surplus versus Australia whose current account is nearly as bad as the
    U.S.       

  2. Rate
    hikes are likely in Canada, whereas in Australia they are likely nearing the
    end of their tightening

As always, feel free to send
me your comments and questions.


Dave