Wednesday, May 19, 2010

Australian Dollar Is Also Crashing - Carry Trade Unwind?

in case you haven't noticed...

While we are mesmerized by the spectacular collapse of euro after the announcement of the bazooka $1 trillion "rescue" plan, Australian dollar has been on a steep decline since the beginning of May. From May 3rd to May 18th, it lost 6.9%, dropping from 0.9265 to 0.8630. In Asia, A$ is currently trading at 0.8566.


It seems like an unwind of carry trade. As the market uncertainty increases by the day (the latest being Germany's ban on naked CDS and naked short selling) if not by hour, investors seem to be dumping high-yielding currencies like A$ and NZ$ (which is also declining rapidly). They are putting the money into "safe haven" - US$, Japanese yen, and gold. I personally don't think the first two are necessarily "safe", but comparatively speaking they may be. Besides, they have been the funding currencies for carry trade.

The line chart below is the comparison of major currencies since May 3rd.

Unlike euro, A$ is only taking out the low of February (0.8582) this year, and nowhere near the October 2008 low of 60. Technically, what's ominous to me is that A$ has crashed through both 50-day moving average and 200-day moving average. The last time it happened was July 2008. By the end of October 2008, the currency lost more than 30%, going from 93 to 60.


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