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> Forex Focus With Greg McKenna

Greg McKenna has spent the past 2 decades in Financial Markets in a number of senior roles including Head of Currency Strategy at the NAB and Westpac. While a Fund Manager with the New South Wales State Super Fund he managed substantial Cash, Bond and Foreign Exchange funds consistently in the top tier of Fund Managers in his asset class.

Greg holds a Bachelor of Business (Banking and Finance) from Monash University and a Master of Applied Finance from Macquarie University.

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Forex Focus With Greg McKenna
Forex Focus
post Posted: Feb 28 2012, 11:04 AM
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Posts: 4

Gold bulls on the march again

I read on Flipboard that US Hedge fund manager John Paulson is getting long gold and telling others to get on board as well because of the inflation that is coming down the road from governmental policies being run at the moment. With all due respect this sounds a little bit like what we used to call “book talking”. That is when you have a position on you love it and you talk it up – you are in effect talking your book.

The History of the types of financial crises we are having now suggests that Mr Paulson is right but frankly I have no idea when the inflation he is talking about is going to come. But to reiterate I do believe that it is on the way eventually. Equally however I believe that the globe is closer to deflation than inflation at the present time on the back of still weak aggregate demand in the private sector and a political love affair with austerity which is also dampening demand in individual and the global economies.

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But something is up in gold again as I write and as you can see in the chart (from Bloomberg above).

But what’s going on?

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The answer may lie in the chart above and some interesting analysis from Jeremy Grantham’s money management firm GMO which I also picked up on Flipboard this morning.

it bears mentioning that OECD investment demand for gold still remains far, far below historical highs from 30 years ago. But the broader view suggests, in contrast, that reserve-accumulating economies in Asia are the larger drivers of demand, as they must offset their long exposure to OECD currencies.

Indeed, according to the GMO chart, emerging Asia has now crossed the 50% threshold as a portion of global demand. This underscores again that the current bull market in gold has few similarities to the previous example, and analysts should use caution when drawing on the experience of the late 1970′s.

I find this relationship worthy of further investigation. Certainly as I noted above I don’t think real sustainable global runaway inflation is going to happen anytime soon but equally I can’t see this demand from the emerging world slackening off either. If you had to place your new and hard-won wealth into an asset would you buy the currencies or debt of the developed world or something harder and more substantial.

So maybe just maybe, like the Aussie Dollar, gold is going to defy many for longer than we thought previously.

post Posted: Feb 10 2012, 12:34 PM
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In Reply To: Forex Focus's post @ Feb 10 2012, 11:24 AM

Hi Greg,
Let's get real here.Your CV says you were head of strategy (Currency) at WBC,NAB. Good for you!
However perhaps you could share with forum members the accuracy of WBC and NAB's exchange rate forecasts in recent years? Just in case your memory isn't up to it,the answer is absolutely hopeless.
Despite this, various exchange rate gurus and interest rate gurus love to expound their great knowledge while ignoring their numerous 'miscalls' (and that's being kind)

Forex Focus
post Posted: Feb 10 2012, 11:24 AM
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Posts: 4

RBA goes back to the future – Mining will save us

This week the RBA decided to leave rates on hold, much to my chagrin to be honest. But it's not the first time I have differed in my views from the RBA – last year when they were talking up rates was just the most recent case in point.

But in the spirit of what I saw in the Statement from the Governor yesterday I decided to drive my DeLorean into the office today – well I didn't really – but yesterday's RBA Governors Statement was something straight out of the "she'll be right mate – we've got a mining boom" school of thought that we saw in 2011 before the imperative of household retrenchment and de-leveraging aided by a little bit of European turmoil saw the RBA cut.

And it does feel a little bit like back to the future from the RBA. That's not to say that I didn't get it wrong yesterday and not to say that the wording in the Governors Statement doesn't suggest that I got it wrong but that I got it horribly wrong. But it is to say I think that like 2011 the RBA is wrong on this "she'll be right mining boom not worried about households" approach they are reverting to.

I spent a lot of spare time last year researching the hub and spoke – central tendency/risks approach to Monetary Policy that the RBA follows and blogged it here at MacroBusiness and this informed my thinking across the year and saved myself and those I work with quite a bit of money as the economic situation evolved.

But it doesn't change the fact that I think the RBA has a structural bias to tighten given its raucous cheerleading of the mining boom and China growth story.

Here is the wordle version of the RBA Governors Statement and you can see just how big inflation looms in the document as does conditions, growth and declined. Indeed I look at this in the context of the current market environment and I look at the first 4 paragraphs of the 5 paragraph Statement and I read a story that could have supported an easing.

But then I get to the last paragraph and I read,

"With growth expected to be close to trend and inflation close to target, the Board judged that the setting of monetary policy was appropriate for the moment. Should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy."

They are not concerned with the structure of or make up of growth just the overall growth number, fair enough – but this is heavily mining investment and boom related.

But here is the big question for all of us trying to read their thinking – what exactly does "weaken materially" mean?

Is the RBA saying the economy has to fall in a hole now for further monetary accommodation and if so how big does the hole have to be. We'll have to wait and see as the data evolves but even with a bias to ease that the RBA suggests it has, the hurdle rate, in terms of economic weakness, for the next cut just got a lot higher.

Forex Focus
post Posted: Jan 25 2012, 02:28 PM
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Posts: 4

Yesterday Alan Kohler wrote a piece saying the Aussie is being buoyed by people using the Euro as a funding currency. Last night Nouriel Roubini wrote a piece that said notions of the Euro as a funding currency are bunkum. I tend to agree more with Professor Roubini than Mr Kohler but as I wrote back on January 5th the Aussie Dollar maybe just doesn't have a choice except to appreciate given that,

if the Swiss national Bank doesn't want Switzerland to be Switzerland than perhaps Australia has no choice.

But the currency is certainly biting hard into Australian industry and I wholeheartedly agree with Australian Industry Minister Kim Carr when he says that Australian business continues to need assistance from the Government. The float of the Australian Dollar has served our nation well over the last 28 years. It worked as a natural shock absorber both to the up and downside which made the RBA's job of managing the economy all the easier and gave us a much more stable economic growth profile. My personal belief is that it was the currency that is in large part responsible for our 22 odd year unbroken run without a recession.

But as I've been writing for some time now something has changed. That something is simply that Australia and our currency is just one of the best risk adjusted currency bets on the planet at the moment and so people continue to pile in.

In truth though what else would you expect in a world where government's are manipulating their currencies lower and central bankers are keeping rates as close to zero as possible and in a world where Sovereign governments remain under intense fiscal and debt pressure – Australia simply stands out. Australia is clearly one of the strongest AAA rated Sovereigns on the planet, it has relatively high interest rates, has a relatively low fiscal balance and low debt levels by global standards and even with the Household retrenchment we have been writing about for ages the mining boom continues to roll on unabated.

So Australia is a beacon in a dark world for investors.

As a result of this the Australian Dollar remains the darling of the investment community and has been sitting above parity for the best part of 12 months now. But that period is long enough to bite into industry and start to change investment and operating plans for business. And so it was over the past 24 hours that Toyota announced that it will be reducing its workforce by 350 people at its Alton plant in Victoria – that's a little more than 10% of the workforce. As it stood last year, according to the SMH, Toyota produced 94,000 cars last year,

"exporting about 60,000 of them mainly to the Middle East and 13 other smaller overseas markets.But those figures are almost 40 per cent shy of the company's peak output of almost 149,000 cars in 2007."

Clearly when you export so much of your product a currency that the punditry told you would only be temporarily above parity which persists at such a historical extreme level is going to hurt your export sales – the high Aussie just makes your product so much more expensive in the currencies against which you have appreciated. So, like other businesses, Toyota is forced to look at its costs and reduce them – the easiest way is to reduce workers which theoretically are a floating, not fixed cost, in order to keep the rest of the workforce in place.

And so it goes, whether its Toyota, Heinz or other businesses the high Aussie is a drag on the economy when the domestic economy is already slowing down at 1.05 and change it's still too high.

But along with a number of other markets the Aussie has broken higher this month, taken out the top of down trend channels and is set up to challenge the mid 1.07′s perhaps even all the way back to 1.10. Lets have a look at the charts.

Long Term – Weekly Chart 20 years

You can see in the chart above that the Aussie is in an up trend – it is somewhat tenuously drawn given I have fitted the lines but overall it still hasn't even had a 38.2% retracement of the move from the 0.62′s where its rally began after the crash of 2008. 0.9250 was the big level when the Aussie fell last year but real money buyers lurking above their chased it back – a little bit of a market bounce helped too but nonetheless long term technicals its still strong.

You can see this in the chart below which covers the weekly moves over the shorter 5 year time span.

Daily for the past 2 years

Looks like the Aussie has broken out of a nice big wedge and has moved above the 200 day moving average, and crucially held on both a daily and weekly close, for the first time since September last year.

Trading wise the outlook is also positive because after failing initially last week at shorter term resistance the Aussie has broken and held on a weekly and daily basis. It's broken short-term downtrend resistance and broken back inside the bottom of the previous up trend channel. Equally my Bollinger band strategy has it still in an uptrend even if the MACD feels a little overcooked. Huge support in the 1.0380/1.0420 region on any pullback.

Positioning has increased materially as you can see in the chart above from Bloomberg and the CFTC on futures traders but it is not at extremes so, in this sense, positioning is not an impediment to any further increase in the level of the Aussie.

Yesterday when I wrote about the Euro Bounce , which fortuitously occurred overnight (I'll take my luck when it comes ) I also said the Aussie's close had been really strong as well. There in lies the rub – over the past 3 months the Aussie's correlation with the S&P daily has been 0.91 (direction of price moves) and a lower, but still substantial, 0.80 with the Euro and European credit spreads and markets such as Itraxx.

So this is still a risk based rally but one that I think still has some legs.

For traders this is good news, the trends look like they have legs and as we all know the trend is the friend and all that. But for Australian industry, Toyota workers, Heinz workers, Aluminium workers in the Hunter and others yet to fall, the persistence of the Aussie's strength is changing our economy. For mine this is a long run negative for the economic outlook as it narrows the biodiversity in the economy making it weaker by making it more dependent on what is left.

We are unlikely to fix our currency in the way that many others are, either explicitly or by stealth, so I agree with Kim Carr. Let's work out what industries are important and subsidise them – surely its analogous to helping farmers in a drought. The Aussie won't always be so high, but I fear it might go higher yet, so let's try and keep as diverse an economy as we can.


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