Aussie Dollar at the Crossroads

More than just the Worlds favourite punt

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 Im a bloke who wanted to be a dealer from the day they floated the AUD in 1983 I was 14. I was on the dealing desk at Westpac in 1988 as an 18yr old I have traded, managed Cash, Bond and FX Portfolios, been a Currency/Market Strategist and a Bank Treasurer. But I am a family many first and live on the coast in NSW 200 kms from Sydney My Investment Company Is Lighthouse Securities and my new passion is www.GlobalFX.com.au which will bring institutional quality FX and Market Research to the retail market.

Who am I

Here is a few snaps

My Process
Simple but a little complex
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How to understand FX pairs

A little bit of History

 The AUD was floated in December 1983 to give the RBA more control over monetary policy Since the Float it has traded in a range of .4775 to 1.1080 The RBA prefers a clean float and intervenes rarely As a commodity currency the AUD has generally moved up and down with global growth The AUD is liquid for most of the trading day This combines to make AUD the 5th most traded currency in the World with 7.6% of turnover.

The worlds favourite Punt

AUDUSD
1.15

1.05

0.95

0.85

0.75

0.65

0.55

0.45 Dec-83

Dec-85

Dec-87

Dec-89

Dec-91

Dec-93

Dec-95

Dec-97

Dec-99

Dec-01

Dec-03

Dec-05

Dec-07

Dec-09

Dec-11

Source: FARM, Bloomberg

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AUD since the Float

1. 2. 3. 4. 5.

Global Growth and Commodity prices Domestic growth and Interest rates Global Risk Appetite/Aversion Techincals and The USD - the other side of the coin.

5 Drivers

1986 - 2001
Copper
3,500.00 3,000.00 2,500.00 2,000.00 1,500.00 1,000.00 500.00 0.00 Apr-86

2001-2012
AUDUSD Copper AUDUSD

0.95 0.9 0.85 0.8 0.75 0.7

12,000.00

1.15 1.05 0.95 0.85

10,000.00

8,000.00

6,000.00

0.65
0.6 0.55 0.5
Apr-88 Apr-90 Apr-92 Apr-94 Apr-96 Apr-98 Apr-00 4,000.00

0.75 0.65

2,000.00

0.55
Apr-03 Apr-05 Apr-07 Apr-09 Apr-11

0.45

0.00 Apr-01

0.45

Source: FARM, Bloomberg

www.GlobalFX.com.au

Source: FARM, Bloomberg

www.GlobalFX.com.au

AUDUSD v LME Copper

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RBA Commodity Index USD

AUD/USD

180.60 160.60 140.60 120.60 100.60 80.60 60.60 40.60

1.1500 1.0500 0.9500 0.8500 0.7500 0.6500 0.5500 0.4500 Jul-85 Jul-88 Jul-91 Jul-94 Jul-97 Jul-00 Jul-03 Jul-06 Jul-09 Jul-12
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20.60
0.60 Jul-82

Source: FARM, Bloomberg

AUD v RBA Commodity Index

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MSCI Metals:World ratio

0.45 0.40 0.35

AUDUSD

1.15 1.05 0.95

0.30 0.25 0.20 0.15

0.85 0.75 0.65

0.10 0.05 0.00 Jan-02 Source: FARM, Bloomberg

0.55 0.45

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

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Commodity Shares vs The Market

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AUD 2 yr - USD 2 Yr
6.00

AUDUSD

1.2

5.00

1.1
1 0.9

4.00

3.00

0.8
2.00

0.7
1.00

0.6 0.5 0.4

0.00

-1.00 Nov-99

Nov-00

Nov-01

Nov-02

Nov-03

Nov-04

Nov-05

Nov-06

Nov-07

Nov-08

Nov-09

Nov-10

Nov-11

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Source: FARM, Bloomberg

Interest rates

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Bah! Old World

NASDAQ
6,000.00

Ahhh - QEinfinity
S&P 500 AUDUSD

AUDUSD

1.15

1,800.00 1,600.00 1,400.00

1.15 1.05 0.95 0.85 0.75 0.65

AUD=Old World
5,000.00

1.05 0.95 0.85

4,000.00

1,200.00 1,000.00 800.00 600.00 400.00

3,000.00

0.75
2,000.00

0.65

1,000.00

0.55
Aug-98 Aug-01 Aug-04 Aug-07 Aug-10

200.00 0.00 Aug-95

AUD= QE Bet
Aug-98 Aug-01 Aug-04 Aug-07 Aug-10

0.55
0.45

0.00 Aug-95

0.45

Source: FARM, Bloomberg

www.GlobalFX.co m.au

Source: FARM, Bloomberg

www.GlobalFX.com.au

AUD v Equities/Investor Sentiment

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Technicals 2008 - 2010

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Speculaltive Aussie Dollar Futures Positions

100,000.00

AUDUSD

1.15 1.05 0.95 0.85

80,000.00

60,000.00

40,000.00

20,000.00

0.75
0.00

-20,000.00

0.65 0.55 0.45

-40,000.00

-60,000.00 Oct-07

Feb-08

Jun-08

Oct-08

Feb-09

Jun-09

Oct-09

Feb-10

Jun-10

Oct-10

Feb-11

Jun-11

Oct-11

Feb-12

Jun-12

Oct-12

Source: FARM, Bloomberg

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CFTC CoT - Speculators

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AUDUSD

USD Index (inverted)

1.15 1.05 0.95 0.85 0.75 0.65

60 70 80 90 100 110

0.55 120 0.45 Aug-95

Source: FARM, Bloomberg

Aug-97

Aug-99

Aug-01

Aug-03

Aug-05

Aug-07

Aug-09

Aug-11

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US Dollar

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Something changed

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Greek CDS Prices

6,000.00

5,000.00

4,000.00

3,000.00

2,000.00

1,000.00

0.00 Mar-10 Source: FARM, Bloomberg

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11

Sep-11

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January 2011: Fitch becomes the third rating agency to cut Greek debt to "junk" status after S&P and Moody's. May 2, 2011: Finance Minister George Papaconstantinou again rules out a debt restructuring, adding that he has just "expressed the hope" that the EU and IMF will agree to extend bailout loan repayments. May 21, 2011: Mr Papandreou and senior ECB officials say Greece must avoid debt restructuring and push on with budget cuts and privatisations to overcome its debt crisis.

GREECE

changed everything

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EURUSD

AUDUSD

1.65 1.60

1.2 1.1 1 0.9 0.8 0.7 0.6

1.55
1.50 1.45 1.40 1.35 1.30 1.25 1.20 1.15 Jul-07 Dec-07 May-08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12
Source: FARM, Bloomberg

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The market realised that there was not going to be an easy fix to this crisis and Reinhart and Rogoff were right. THIS TIME IS CERTAINLY NOT DIFFERENT

Reinhart and Rogoff

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 The last 18 months is different to the previous 27 years of the Aussie Dollars float The AUD and Australia are now safe harbours Where else would you put your money? More Central Bank and sovereign buyers is a big shift

Greece+GFC = Shift in perceptions

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OK, big deal what about the future

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When institutions look for alternatives to holding large deposits earning a near zero return, they look not just at domestic assets, but at foreign assets as well.
RBA Deputy Governor Phil Lowe November 2012

THATS WHAT IT IS ALL ABOUT Interest rates and return of your money

Outlook

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 In trading being in cash is a position That is what Australian Bonds and the AUD represent to offshore investors This is the opposite to its history since the float where bad times were hard for AUD longs While the GFC persists and the Australian economy does relatively well the AUD will remain supported There just isnt another credible developed world alternative.

AUD stronger for Longer

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 Global growth and commodity prices have a weak outlook Australias growth profile has weakened but still the envy of many developed nations. The RBA is cutting reluctantly Investor sentiment is for a bar bell risk in equities and safety in AUD bonds Technicals are going nowhere on the monthlies and the weeklies though The USD is strengthening which may contain AUDUSD but crosses will benefit

The 5 Drivers positives in the negative

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Chinese growth a driver

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107 106 105 104

Australian Cash Rate - Chinese Leading Indicator

9 8 7 6 5

103
102 101 100 99 98 97 96 Jan-98
Source: FARM, Bloomberg

China Leading Indicator Cash Rate Adjusted for Repricing RBA Cash Rate (6 Month Lag)

4 3 2

Jan-00

Jan-02

Jan-04

Jan-06

Jan-08
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Jan-10

China is Australias dominant trading partner Its demand for resources drive a large part of the economy On this metric alone interest rates seem about right

Chinese growth and interest rates

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S&P 500

AUD

1,600.00 1,500.00

1.2 1.1 1 0.9 0.8 0.7 0.6 Jul-08 Dec-08 May-09 Oct-09 Mar-10 Aug-10 Jan-11 Jun-11 Nov-11 Apr-12 Sep-12
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1,400.00
1,300.00 1,200.00 1,100.00 1,000.00 900.00 800.00 700.00 600.00 Feb-08
Source: FARM, Bloomberg

While Equities hold up the Aussie Dollar safe haven status is unassailable

Equities are the key

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 I believe that currency markets are least ugly contests Currently given the parlous global back drop and zero interest rates the AUD stands out as a good risk/return trade off While China lands softly this view will remain solid and with it long term fundamental buying But the AUDs safe harbour status is a result of the GFC and of the weakness in other developed markets once alternatives appear money will flow to them again and out of Aussie dollar and AUD assets This is likely to take years though so AUDUSD is likely to stay stronger for longer.

In Summary

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1.0565 opens way to 1.1080 and then 1.15/20 1.0140/50 current range bottom break opens way to 0.9970 then HUGE support at 0.9560/9600

Key levels

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