96.92… we’ll explain the significance of this number in a moment.
Everything has fallen over the past 24 hours.
Aussie stocks dropped 2.6%… closing at the lowest level since mid-2009 (but not the lowest intra-day price. That occurred on 8 August).
Overnight, U.S. markets fell too. The Dow Jones Industrial Average fell 3.5%… and the benchmark S&P 500 dropped 3.19%.
In Europe markets fared even worse. The FTSE 100 sank 4.67%, the German DAX fell 4.96%, and the French CAC 40 dropped 5.25%.
As the Age helpfully pointed out late yesterday, we’re in a “bear market” – thanks for letting us know!
But it’s not just stocks. Gold has taken a beating too… trading as low as USD$1,724. Has the gold bubble burst? Or is it still bursting?
As you know, we don’t believe gold is in a price bubble. Besides, in Aussie dollar terms, gold is doing just fine – trading at $1,780 as we write… only $30 or so from its peak in August.
But gold isn’t alone. Silver dropped 11%… copper is down 13% from the peak… tin is down 31% from its peak… and West Texas Intermediate Crude dropped 6.3% overnight.
Finally, one other thing has dropped. This is where we get back to the significant number we showed you at the top of this letter – 96.92…
It’s the number for an asset that’s fallen 11.9% since it peaked in late July… an asset we were told would “never be sold again”… an asset the mainstream told you as recently as this week was “stronger-for-longer”…
You know what we’re talking about. That’s right, the Aussie dollar. Early this morning, the Aussie dollar slumped to USD$0.9692.
And there’s sure to be some red faces in the mainstream today. The jingoistic cheering-on of the Aussie dollar has been embarrassing. “It’s a new reserve currency”, they stupidly yelled.
“Australia is a safe haven from North America and Europe”, they dumbly proposed.
Turns out, as we’ve warned you all along, when push comes to shove, traders will dump the Aussie dollar in droves. Australia isn’t a haven for foreign investors.
As we wrote, as recently as 20 July:
“When the proverbial hits the fan again, there’s one thing you can bet your bottom dollar on. And that’s offshore players will forget their comments about the ‘bullet proof’ Aussie dollar.
“They’ll ditch it and run for cover… just as they did in 2008.
“Forget the jingoism about the Aussie dollar. And the claims it’s one of the new reserve currencies. The Aussie dollar is what it’s always been – a commodities play.”
Look. We’re not saying, we told you so. We’re not vain enough to say we get everything right, because we don’t. But we know when something doesn’t make sense.
The idea of the Aussie dollar becoming a reserve currency and investor haven was one of those stupidities. And now the market has realised this and regained its senses.
That’s one of the things we love about the market… especially free markets. Its habit of making fools out of fools… especially those who think they can manipulate the market as they see fit.
Of course, there’s every chance the market will lose its senses again. And the mainstream clowns will once more crow, “You see, the Aussie is a reserve currency… it is a safe haven.”
If that’s what they want to think, fine. But us? We prefer the insight of our in-house technical analyst… Slipstream Trader, Murray Dawes. He sent the following chart to your editor this morning.
It’s a five-year chart of the Aussie dollar against the U.S. dollar:
Click here to enlarge
Here’s what he told us:
“The Aussie dollar has just turned over into long-term downtrend with the 10-week moving average (MA) crossing the 35-week MA. You can see in the chart that each time this has happened in the past five years we have seen a sharp sell-off. Also, we have fallen under the 2008 high of US98.5c causing the weekly chart to look like a potential double top.”
Bottom line: Murray is bearish on the Aussie dollar. It doesn’t mean the Aussie will head south in a straight line. But it means a move down is a higher probability.
And given his track record of short selling this market we’re loathe to ignore his views.
[Ed note: he's just sent his traders a message telling them to close out a 17% gain on Fortescue Mining... not bad for four weeks work!]
Don’t forget, the daily turnover in currency markets is huge…
According to the Bank for International Settlements, in April 2010 the daily turnover was USD$3.98 trillion.
With around 7.6% of that volume involving the Aussie dollar. It’s hard to know the exact numbers, but only a fraction of daily trade involves transactions for goods and services. Most currency trading is traders and speculators buying and selling currencies based on their view of the market.
As soon as the sentiment switches from one side to the other you get big price moves… as you can see on Murray’s chart above.
And that’s the point we want to make to you today. The high Aussie dollar never had anything to do with reserve currency status or safety. It was all about traders punting on Chinese economic growth and soaring commodity prices.
If traders start believing China won’t grow as fast and commodity prices won’t rise as fast, well… there’s not much reason to buy Aussie. Put it this way, foreign investors aren’t about to buy Australian dollars so they can invest in Myer or Harvey Norman shares.
The Aussie dollar has always been a “risk” asset… and guess what? It always will be.
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Written by Kris Sayce
Kris Sayce is Editor in Chief of Australia’s biggest circulation daily financial email — Money Morning. (You can subscribe to Money Morning for free here).
Kris is also editor of Australian Small-Cap Investigator, his small-cap stock research service, where he provides detailed analysis on some the brightest, smallest listed companies on the ASX.
If you’re already a subscriber to these publications, or want to follow his financial world view more closely, then we recommend you join Kris on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.