Wait For Divergences in the AUD Near the End

A few soft days and the bears clamor for P3 down or the end of a large Ending Diagonal. Instead I am watching the AUD. An interesting correlation since the Global Financial Crisis has been AUD and the S&P.

The rationale for the correlation is the Global Scramble for Yield that I first mentioned almost a decade ago - in a low return enviroment money mangers scramble anywhere they can for smidgeons of yield. The Greenspan Put exacerbated this, and so too the Bernank's QE.

The more specific correlation is that QE drives up commodities, something also predicted here, and therefore commodity currencies like the AUD. Australia, however, is now in a bind, as its currency is over-valued for its value-added industries, and its mining exports are suffering due to the Chinese slowdown that may yet turn into a hard landing. Indeed, the AUD correlation broke over the past nine months as China began to slow:

Some traders also watch the AUDJPY corelation, which also broke down. 

The bind puts pressure on the RBA to lower rates, to weaken the AUD and support the slowing failing housing sector.  

We can tell which it is (liquidity pump/optimism or rush to safety/fear) by looking at the TNX (ten year Treasury). In the final rush to safety, its rate should fall below their recent low of 1.4%, maybe down to 1.2%. Right now the TNX has gone the other way, and many pundits - including EWI in a recent bond report - says the great bond bull market is over. We'll see.  

The neoclassical economics have pushed the liquidity pump, and want it to be followed up with fiscal stimulus. Problem is, that ain't happening as tea party types around the globe have instead pushed for various forms of fiscal responsibility and austerity. This has caused many of the leading economists to get a bit hysterical, since they know that the liquidity pump sans a fiscal pump leads to a deeper drop than we saw in 2001 or 2008. Hence you see in a lot of predictions a growing sense of a disaster, a cliff the world is about to fall off of.

In the short run, such as US equities this past week, we saw a fade off the recent QE rally. Indeed, most of the QE Rally across various markes is gone, except in commodities. Does this mean we have topped? Unlikely. Neely sees us in a pattern which should soon turn north again, have a fade, then another runup. This might unfold all the way into the election, expecially if it remains close.  

Rather than call the top, watch the divergence. 

Comments

[Hockthefarm]

Y:

Great correlation aud/spx. I was training 2 engineers from China last week. As I got to know them over several lunches and dinners it became clear that they knew nothing about their own economy (about what we would expect from a grade 8 student here). Communism in action.

As for Prechter, it is not just his P3. It is RE for pennies on the dollar, bankrupt banks, sky high US$ and a full monty commodity collapse. Dow 1000 anyone? I don't think there is anyone left to argue about his timing capabilities. Friday's stu is full of wiggle alternates. The real question for me is "does he have the big picture right"?

What I really like about Prechter is his insights and his efforts to translate them into real market responses. And I think Irving Fisher (arguably the greatest economist ever), would agree with most of what he has written in the last 5 years. The great learning from Fisher on the GreatD was to never let your society get too far in debt, because if you do, there is no policy rsponse to get you out of it. Then along came Greenspan and he led the west deep into the very thing Fisher warned us about.

As for the current market, down 5% tops in the spx and then +10 - 15 % into May.

Hock

[Virgil]

The AUD appears to be in a great big contracting triangle since July '11 and just finished up the D wave. D always seems like the messiest and hardest to count, kind of like a fourth. So down from here appears to be the likeliest direction, and that means down for commodities, China, mining, etc. How long can the stock market resist that deviation from its correlation?

The one caveat is that triangle is just really obvious now. All the currency Elliott counters I can see have the same triangle identified and all are looking at the same chart. When everybody expects the same thing is when you can expect something else to happen.

[Hockthefarm]

Bye, bye Greece:

They lied to get in, and now they want to live like they were a productive society. It's hard to believe that nobody thought for one minute about the Greek people, their view of work and their values before they were allowed into the club.

http://globaleconomicanalysis.blogspot.com/2012/10/greek-citizens-storm-defense-ministry.html

This one is over on humanitarian grounds if nothing else.

Hock