Tag: Currencies

This article is a continuation of our short Australian dollar “AUD” thesis. In this post, we zoom in on the battered British Pound Sterling “GBP”. We are of the view that all the negative news (BREXIT, lack of a clear majority in the parliament, Carney’s recent remarks) is most likely priced in to the GBP. On the other side of the equation, we see plenty of signs that China is most likely headed into a recession and we don’t think this has been priced in to the AUD.

• China iron ore prices show no signs of bottoming. The pain continues!
• There has been a sharp turn around in China’s inflation surprise index. With the demographic time bomb that is ticking in China, it is deflation surprise that we should be interested in, not inflation surprise!
• China’s broad money, as measured by M3, grew at an average rate of around 15% from 2001 to 2013. It started decelerating in 2014 and is continuing to decelerate. It is now growing at a year over year rate of just over 10%! Decelerating money supply is a harbinger of ‘slowing economic activity’ / recession.
• What is even more alarming is that China’s yield curve, as measured by 10 year yield minus 2 year yield, has now inverted. Another warning sign of a recession to come!
• All signs are now pointing to a recession in China and being short AUD is a sure way to play that game.

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On the monthly chart of the currency pair, if you count the 2008 high of 2.08 as the high and 1.16 low of late-2012 as the low, then the price action fits the following pattern:

1. The ‘high to low’ move was followed by a clean break of the 76.4% retracement level and a successful test of the 61.8% retracement level of that move.
2. The pair found support at the 76.4% retracement level, broke through the 61.8% level and successfully tested the 50% retracement level.
3. The pair found support, again, at the 76.4% retracement level and as of this writing is testing the 61.8% retracement level around 1.5125.

A clear close above 1.5125 should open up further possibilities of retesting the 50% retracement level at around 1.62, that’s a thousand points if you are a forex trader.

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