Thursday, October 25, 2007

AUDUSD if you're not long you're wrong.

The outlook for the USD remains negative, with the market pricing in fully the probability of a 25bps cut to to the Fed funds rate on the 31st of October, and some economists pricing in a 50 bps cut and all of us (in Oz) are aware of the probability of the Reserve bank slapping us in the face on that most sacred of days, (Melbourne Cup Day) with another rate rise.
The reduction in yields is a reflection of the lower economic growth predicted for the US and it's not really hard to see why the market is predicting that. Merrill Lynch's announcement of more than $8bn of credit market write downs was a stinker, pure and simple, and we're already seen big losses at other banks, (Citi, GS et al). The housing data remains terrible, the only thing underpinning the economy is consumer spending, which sooner or later will have to abate.
On the plus side for the AUD, continued Chinese growth and demand for our natural resources seems set to underpin a strong, high yielding Aussie dollar.
I'm playing this long by purchasing AUD at low 9000s, with a stop about 50 points below. Keep rolling that stop up and take profits the other side of 9100 in the short term.
*The trend is your friend*

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