Is AUDUSD done?

One of the  key components of the global markets - AUDUSD is showing some strange behaviour, that could translate into the full-blown panic in not so distant future.
In the coming days we should find out if the current wave is an impulse as shown bellow and hence if we could expect an unravel of carry trade in months to come.

XLE shows the way?

The year end rally for AUD/USD has finished exactly 31st Dec. The odds are high the cyclical strength of the green back is here for rather a long period of time. 90 in the index (DX) should be taken this year without any difficulty.
But for the moment a quick look at the XLE ETF. The rally started in July is coming to the end, my preferred date for the top is around the state of the union speech (Jan 25th):

Year end rally?

The very important currency pair AUD/USD may be signalling an imminent end of the correction and the start of the year end rally. The top around 1.05-06 may be a very long term one, but for the moment, let's forget all the future austerity programs and chinese inflations.

AUD/USD: the end is nigh

My best guess for an important, as for the stock market, currency pair: AUD/USD.

It seems that we're near the end of the correction, more precisely in the C which has the form of the ending diagonal. I estimate the end of this wave and thus of the entire correction at 0.9246

Good bye, carry trade!

Euro has finally started to show some resiliency after yesterday's rally.  Isn't surprising?
The chart of EUR/AUD is speaking by its self:

Is it it?

Great news, they have finally did it! Great news for the Euro bears in the long run, but a bit of pain for the moment. May be, again until 1.3850.
Meantime AUD/USD has flashed a big sell signal this morning dropping after a gap up  in the clear 5-wave pattern. We have missed by 16 pips  the Nov' 09 recovery high. Is it the end? Will AUD be joined by its peers CAD and silver in coming days?

Is the game over?

As I've been expecting, the EUR has started a sharp rally the day the payrolls data was published. Numbers was ugly, but market participants have justified buying by the supposed new stimulus package the Obama's administration would be supposed to launch later this year. OK, the rally has happened to be the correctional wave C of the first wave down for the EUR/USD (the wave up for the USD index).
The EUR/USD has broken this night the 1.4215 support provided by the bottom of the 1st wave. The main reason du jour,   now, seems to be the defeat of democrats in the senatorial election in Massachusetts. I think it's pretty clear that electors send a message about administration's costly plans on health reform as well as about others possible stimulus packages. And given that we're in the mid-term election year, if democrats don't want to be hammered they will listen vox populi.

I wouldn't expect EUR/USD to fall off the cliff right now. Indeed other components like canadian or australian dollars still hold rather strong. So a sharp counter trend rally in EUR/USD is very likely before we really start to sink. And, of course, that rally shouldn't exceed the high of the wave C - 1.4580.

A small check-up

It's how I would call the sell-off in risk assets that has followed Dubai's announcement. As a result of this check-up, - everything is in place and working: firstly sell emerging countries debt, stocks and currencies, simultaneously buy dollar and contracts on US government bonds. Fine, mission accomplished!
By its self, even the Dubai's default is far from being able to put in danger the world's financial system as it was the case with Lehman Brothers. What is more important it's the reminder to an average investor: "Ok, here in US, Europe, Japan, things are ugly and you can't earn anything on your money, but  be careful when you go outside! Even if it looks great (as Dubai did) it can hurt badly and you'll loose about everything."

Now let's look at currencies. Bellow are two of them : the  Euro, something like a big cap (of DOW Industrial index) and a "high beta small cap" - Australian dollar. And in this space the flight to quality is obvious.

As we can see for EUR/USD, the sell-off wasn't able to push bellow the red trend line. It's certainly a sign of strength and resilience for the single currency. Until this trend line resists we're still able to push higher, toward the upper trend line (1.537) . And seeing what is happening with gold, I consider it as a high probability event.

As for the Aussie, I'm happy that my call was confirmed. We have pierced and later busted the supportive red trend line as well as 55 days exponential moving average. That's serious. While AUD/USD have to go under 0.89 to confirm it's down trend, I think, before, it may take some time to consolidate in the 0.89-0.94 range.

So, getting exhausted?

Wednesday's dollar move has finally produced what I've been expecting since quite some time, - a spike on the downside. In my opinion it is one, indicating the trend is exhausting. The kind of spike which doesn't change anything technically and is seen barely as a beep  on the long term charts, but at the moment is perceived by the trading public as a catastrophe: "we gonna crash!"

By the way, the 2 high yielding currencies I'm watching closely (kiwi  and aussie) were far enough from confirming this exploit. Just may be they know something more about Chinese reflation and just may be that is more important than no more significant statements from the FED about long lasting low interest rates? Indeed, are we in the environment where the interest rates or the capital preservation matter more? I'm pretty sure in coming weeks we'll start to see the answer.

Dollar's turning point?

So hated dollar started to show some strength in recent hours. Already, EUR/USD failed to put in new highs  while USD index established new lows. Indeed, index was pushed by the strength of other currencies, among which I would cite Australian dollar, the biggest beneficiary of the reflation process.

Is this weakness real? I think, in any case, AUD/USD must be watched seriously as an indicator par excellence of the Chinese part of reflation. And let's not forget, that at 0.94, AUD /USD is just within 4 cents  from the '08 high, - about a perfect shorting opportunity for someone who does believe in the near end of this fiesta.

Is Gold the best hedge against the inflation?

My positive opinion on precious metals has materialized in the new historical highs for gold and cyclical for silver. The public attention has been largely attracted by the gold installing above 1000 dollars mark. As for me, I'm happy with just new cyclical highs in silver. Really, is the gold the best hedger against the inflation (or should we say reflation) where we are supposed to be ?
Looking at gold to silver ratio we see that gold is a strong outperformer in a deflationary environment, as the one we have experienced last fall. Since the reflation policy has started to work, the silver has started to outperform gold.

We can even try to judge the "quality" of the reflation policy regarding the eurozone on the chart with gold priced in euros: the recent top in dollar is far from confirmation.

Or to find  which country is the biggest bénéficier of the policy of global reflation, looking at gold priced in Australian dollars:

Even Dow  has managed to do better since the reflation attempt has begun:

So, my conclusion is that gold as well as cash is the best investment during the periods of credit stress which we have seen during second half of 2008 and 1Q of 2009.  But for the period of  "reflation" gold under performs other assets (except cash)  and will even further under perform silver should we enter a period of higher inflation.