New Recommendations: Look to sell a rally of the March Australian dollar futures at 66 cents or better, and risk the trade to a close above 68 cents. Take profits on a break to a 60-cent downside objective.
We have seen the inauguration of President Obama as the 44th President of the United States, and his administration will be faced with the challenges of restoring a weak economy. The U.S. stock market sold off after the inauguration to post a close that reflects possibly the worst inauguration day sell-off in history. However, the impetus for Tuesday’s decline may lie with weakness overseas markets. The U.S. markets were closed for the Martin Luther King Day holiday on Monday, January 19, and the overseas markets sold off significantly due to concerns of global recession.
The Australian dollar weakened significantly as well on Tuesday, due to concern that the global recession is deepening with respect to Asian and Australian banks. The U.S. markets have been buoyed by euphoria for the Obama administration and assuaged by a unified and repeated commitment by them to support the financial industry. The global market, however, seems to have held a reserved cynicism that “the other shoe may drop.”
Australia has been perhaps the most aggressive nation (second to the U.S.) in confronting the global financial crisis on the world stage. Australian Prime Minister Kevin Rudd has been outspoken and consistent with both his policies and the execution of those policies to ensure the financial stability of Australia. Reserve Bank of Australia Governor Glenn Stevens has been very aggressive with fiscal policy by cutting interest rates to nearly a 20-year low of 5.25 percent. Last night, Australian Prime Minister Rudd stated that his administration will take “whatever action is necessary” to ensure that Australian companies are not impacted by a possible shortfall from overseas credit lines. Currently, Australian companies receive more than A$142 billion in syndicated loans from overseas banks, with about A$75 billion scheduled to fall due over the next two years. The significant amount of loans to be rolled makes it difficult for Australian banks to cover the shortfall without government’s help. Additionally, it seems concerns are mounting in Asia that bank losses will prolong an economic recovery for the region.
Despite the Australian government’s backing of its financial system, recessionary fears persist unabated and are encouraged by weak economic data. The Australian unemployment rate in December increased to 4.5 percent from 4.4 percent, and the strong U.S. dollar is reducing demand and profit margins for commodities, which reflect a significant amount of Australian exports. Thus, we feel that investors’ aversion to risk will continue to depress the Australian dollar, and barring any significant fundamental shift, bear market rallies in the Aussie dollar should be considered selling opportunities.
Technical Landscape
The daily chart of the March Australian dollar reveals a sideways-down trade with the market in a sharp consolidation since about the beginning of the year. The daily chart depicts a double top formation on January 6 and 7, 2009, with the failure to hold a 50 percent retracement level at 71.8 cents. The market has been in a downward trend channel and we feel the downside objective is 60-cents. First support comes at 64 cents, and there minor support at about 62 cents. Position traders may look to sell rallies of the March Australian dollar at 66 cents or better, and look to take profits on a retest of the 60- cent support level. Risk the trade to a close above 68 cents.
Dennis G. Cajigas is a Senior Market Strategist with Lind Plus, Lind-Waldock’s broker-assisted division. Dan Faretta is a Market Strategist with Lind Plus. They can be reached at 866-631-6216. Dennis can be reached via email at dcajigas@lind-waldock.com and Dan can be reached at dfaretta@lind-waldock.com.
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