Keep selling the news?

Key News

  • British manufacturing activity grew last month at its fastest rate in more than 15 years, a survey of purchasing managers showed on Tuesday, boosting hopes the broader economic recovery is gathering momentum. (Reuters)
  • German retail sales declined unexpectedly in March, falling for two of the first three months of the year and acting as a drag on growth over the period, preliminary data showed on Tuesday. (Reuters)
  • Banks Keep Lending Standards Tight (Wall Street Journal)

Quotable – On Greek debt

“Vilify, Vilify, some of it will always stick.”

                           Pierre De Beaumarchais

FX Trading – Keep selling the news?

In a game of relative value, there’s been good reason to put your money on the Australian dollar. The simple carry-trade theme makes Australia an obvious choice during a time when general financial market risk is surprisingly absent.

The following chart of AUDUSD next to the VIX (indicator of risk or investor fear in the market) shows the inverse correlation rather well – when risk goes down, the Aussie goes up.

Last week we saw a notable uptick in the VIX. The bounce came on support that stretches back to 2007 and 2008 lows.

Similarly, AUDUSD has found a point that’s providing some resistance – its highs from Q4 2009. Today happens to be a pretty major setback along the lines of what Jack talked about yesterday with the euro and the Greek bailout:

Good News, Bad Action

The Reserve Bank of Australia overnight hiked its benchmark lending rate, again. The last couple quarters have set Australia apart from the other major central banks who are still struggling to tighten up amidst nascent job recoveries and sluggish growth trends. We’ll see another instance of this on Thursday when the ECB is scheduled to announce their latest monetary policy decisions.

Major Central Bank Rates

Australia:

United States

Eurozone

Canada

Rates in the United States, Eurozone, and Canada have not budged … while rates in Australia have climb back to retrace 150 basis points since the RBA made the decision to clamp down.

Today though, with the RBA’s latest decision to hike rates, the Australian dollar has not fared well. In fact, it’s leading the way lower today, down nearly a full percent.

Most obviously, the market is taking its cues from the rhetoric accompanying the interest rate decision. And that rhetoric has “pause” written all over it. Apparently the first tightening phase is over. And that’s the bit of info on which traders are latching down, despite the forecast for RBA rates over the rest of 2010, as you can see in the chart below:

And let us not forget about the role China plays in all this. We mustn’t discount the latest “tightening” maneuver by China, raising the reserve requirements again in a telegraphed effort to stem economic overheating and too much speculation and inflation.

Sure, China’s committed themselves to an easy monetary policy and has acknowledge some risk to economic recovery still, in much the same way the Federal Reserve has played its cards, but any steps to slowdown what’s become the world’s growth engine, and more importantly in this case Australia’s growth driver, will hurt the economic expectations that have helped push the Australian dollar.

Something to watch for, at least, as resistance looms.