Rock Star
Currency traders are bouncing to the beat a of new Australian rock star, currently ranked number one on the charts with a bullet. No, I'm not talking about the sweet sounds emanating from a cranked up Marshall half-stack, or from skilled fingers dancing nimbly across the fret board of Fender Stratocaster. The kind of rock I'm talking about is dug from the earth, as in copper, gold, iron, and coal. All of these are available in plentiful supply in Australia, and now that country and the Aussie currency are reaping the benefits as never before.
Friday's action was very constructive for the Australian Dollar, which ended the week at its highest point vs. the U.S. Dollar in more than twenty years. In last week's article, I wrote about the reasons for the Aussie's assent and why it could continue to climb. Not only is China buying more than ten percent of Australia's iron ore and coal exports, now there is talk of the cash-rich giant seeking to buy a stake in the world's largest diversified resources company – which just happens to be based in Australia. Shares of BHP Billiton were up more than 4% on Friday on speculation that a Chinese investment fund is seeking to acquire a 4.5% stake in the company. Talk of the deal helped to send the stock of mining companies and metals prices rocketing higher, and in turn caused the Aussie dollar to strengthen dramatically. This thrust caused Aussie to break above resistance and out of an ascending triangle formation that we discussed last week (see figure 1).
Figure 1: AUD/USD closes above .9500 for the first time in two decades. Source: Saxo Bank
Chinese companies have stepped up investment in Australian miners as they search for stable supplies of iron ore, coal, nickel and other industrial staples in short supply at home. They are taking the long view, expecting China's fantastic growth spurt to continue for years, as a sort of modern-day industrial revolution. Expect this trend to continue as the Aussie continues to benefit from its prime location near China, and its status as the rock star of commodity currencies.
Everybody Hates Kiwi
While the Australian Dollar party roars on, neighboring New Zealand's currency is down in the dumps. A look at the weekly chart of the Australian Dollar – New Zealand Dollar currency pair (symbol AUD/NZD) tells the tale, with the exchange rate approaching resistance that formed back in 2006. We can see that the Australian Dollar has gained steadily vs. the New Zealand Dollar for the past two months (see figure 2).
Figure 2: AUD/NZD rapidly approaches resistance from 2006. Source: Saxo Bank
Why is the Australian Dollar having all the fun while the New Zealand Dollar (often called the Kiwi in reference to the flightless bird that appears on the NZD dollar coin) can't get out of its own way? Black Rock, which oversees $1.4 trillion in investments, said they sold the Kiwi as New Zealand home sales slumped to a 16-year low in April and employment fell the most since 1989. Citigroup pulled no punches, saying the NZD will get "roasted" this year, and Lehman Brothers forecasts a 17% decline by the end of the year. Yikes!
Here's the problem – with all of the recent bad news on employment and home sales comes the expectation that New Zealand's central bank, the Reserve Bank of New Zealand (RBNZ), will be forced to begin a campaign of aggressive interest rate cuts. Also, while the New Zealand Dollar is often viewed as a commodity currency in the same vein as the Australian Dollar, they are not the same type of commodities. For instance, China demands more of the raw materials such as iron ore and coal that are shipped from Australia, as opposed to New Zealand's agricultural exports. All of this could spell bad news for New Zealand's currency going forward, both against the U.S. and Australian currencies.
Not Exactly Margaritaville
Warren Buffet, the world's wealthiest person, is on the road searching for new acquisitions for Berkshire Hathaway. The twist is that he is searching in Europe, so that he can increase his company's exposure to the strong Euro and avoid investing in companies whose value is measured in the weak U.S. Dollar. Berkshire Hathaway has $35 billion in cash, and Buffet wants to put the money to work where he will get the biggest bang for his buck, so to speak. Ironically, he's decided that those dollars will go farther if they're invested in companies that don't earn dollars at all, but Euros instead. Buffet has shorted the greenback at various times for most of this decade, and made his first non-U.S. acquisition in 2006 when he purchased Iscar Metalworking Co., a tool manufacturer based in Israel.
Buffet is not shy when it comes to predicting further U.S. Dollar weakness. "The U.S. is going to continue to follow policies that make the dollar weaker,'' he said at Berkshire's recent annual meeting, which has become something of a financial Woodstock. This year's meeting was attended by an amazing 31,000 shareholders and Buffet fans. Usually when you hear about 31,000 people packing an arena to see a man named Buffet, his first name is Jimmy.
Just Kiss Already!
Two weeks ago, I wrote about how the proposed Microsoft – Yahoo merger wasn't really dead, and how Microsoft would eventually come back to the table after stomping away from the negotiations like a spurned suitor. With Carl "the Matchmaker" Icahn pushing to get these two back together, now we hear a report from the Associated Press that "Microsoft Corp. says it is talking to Yahoo Inc. about a transaction that won't involve a full buyout." MSFT says it's no longer trying to acquire YHOO, but that it "reserves the right to reconsider that alternative depending on future developments and discussions that may take place with Yahoo! or discussions with shareholders of Yahoo! or Microsoft or with other third parties."
Yeah, right! Mr. Softie is trying to snuggle up to Yahoo again, but I guess he's a little bit shy after getting shot down in flames a few weeks ago. Rather than risk another humiliating public display of affection, Microsoft is now trying reverse psychology to win the heart of Yahoo. "Remember two weeks ago when I said I loved you? Well, I don't really love you; now I just want to be friends. But I reserve the right to declare my love for you again in the future."
This is pathetic. Microsoft, we all know that you're in love with Yahoo. Just kiss already and get it over with!
Have a question about Forex trading? Send an email to eponsi@tradingacademy.com and we may use your question in an upcoming newsletter. Until next time, best of luck to you in trading.
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Ed Ponsi is a globally recognized name as a lecturer and teacher and is the former Chief Trading Instructor for Forex Capital Markets. An experienced professional trader and money manager, Ed has advised hedge funds, institutional traders, and individuals of all levels of skill and experience. Ed has appeared on CNBC, CNN International and TheStreet.com, and has recently written his first book for Wiley Finance, "Forex Patterns and Probabilities" (which you can purchase through