By Data Diary

Some interesting currents developing in markets – with credit spreads pulling in different directions, equity market volatility creeping higher, while the USD remains front and centre of the risk trade universe. Hopefully, we’ll get some time to review the first two over the next couple of days, but our immediate attention is on currencies.

One of the focal points for the USD ‘risk-on trade’ has been the Australian dollar. What then to make of the recent divergence between the performance of the AUDUSD (traditionally the commodity trade pair) versus the AUDJPY (traditionally a carry trade)?

Now maybe the USD has become the funding currency of choice of carry traders. It’s possible.  Certainly, there has been a rise in leveraged liquidity out of the US and into emerging markets – after all that is why South Korea, Brazil, Singapore et al have imposed capital controls.  Perhaps the AUDUSD has benefited both as a commodity proxy and as a carry trade pair.  Let’s assume then that in the rise of the AUDUSD we can see the white gloved hand of the Fed at work (I’m imagining Marcel Marceau) – whether it be as a proxy for commodities or simply a carry trade.

But its the most recent price action in the AUDUSD that is most interesting.  It mirrors that of the USD.

A week or so ago, the inexorable falling USD hit something tangible.  It reversed, and with it those many markets tied by the invisible correlation thread.  We won’t print them all here – but whether its copper, gold, emerging market equities or investment grade credit, there has appeared an indecisiveness in price action.  Perhaps we have all been waiting for the Fed.

Are we about to have a quick unwind around the announcement then – as various commentators have suggested?  The Fed is once again leaking it’s intentions – so perhaps the actual FOMC meeting will be superfluous.  The market will have already re-discounted the pre-pre-announced arrival of QE2.

It is in this context that the recent selling by large traders in the AUDUSD is informative.

It’s not a perfect science.  But to the naked eye, it looks remarkably like changes in the positioning of large traders in the AUDUSD generally lead price changes.  It makes some sense.  If its hedge funds using futures to execute trades in the AUDUSD, then we might expect selling into strength and buying on weakness.  Whatever the logic, I reckon it’s interesting that the large traders have been selling the AUD since late September, even as the pacific peso has made its charge for parity.  If recent history is any guide, a deeper retracement in the AUDUSD can be expected.  If the AUD is going lower, then guess we can expect risk assets to join it.

Data Diary

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