POSTING DATE: 27.01.2022
CORE POSITION TRADE: CP28
EXPECTED DURATION: through 2022 thru 2024
DEMAND FOR COMMODITIES POST PANDEMIC
During the global pandemic (Covid-19) the demand for raw materials and commodities slumped.
This came at a bad time for Australia as there was prior to the pandemic, already a slump in place based upon a changing world approach to energy diversification. Commodities in general slumped from 2013 through 2016. The Australian economy has a heavy reliance on Iron Ore and Energy Exports (c.25% Iron Ore, Coal c.15% and Petro-chemicals c.10%).
The double whammy for Australia was that their biggest trading partner, China, experienced its own issues over recent years and cut back... piling on the pressure for the Australian economy.
With regards to the AUD/USD currency pair its main driver remains China and RISK assets. It’s relationship to copper, should never be undervalued.
Initially, China dealt with the pandemic with efficient military style, but as the virus has mutated it has along with the rest of the world been on the back foot in reactive mode rather than pro-active mode. With every wave of mutation comes issues for RISK and the currency struggles as it is strongly correlated to RISK.
The Australian government has been very accommodative to support the economy. In fact, the RBA (Reserve Bank of Australia) has been very vocal about NOT looking to return to normalization into mid-late 2024.
It does however appear that recent mumblings from the RBA are somewhat more pointed towards normalization and the 2024 timeframe looks a little too far out to maintain the existing stance and the RBA looks to be behind the curve if this stance remains policy.
I see the timelines coming closer regarding normalization.
With regards to the USD....
The FED did what the FED now appears to do for every issue, that is print money, flood the market with easing and this ensures the USD safe haven capability during a crisis.
The FED was DOVISH, but now in 2022 with the pandemic starting to appear in the rearview mirror together with high inflation created by supply chain issues together with wage inflation the FED is now turning HAWKISH. A series of interest rate increases are planned for 2022, along with Quantitative Tightening as the FED wants to reduce the size of its balance sheet given the quantity of assets purchased via an aggressive Quantitative Easing program over the past few years.
The U.S. economy has a massive debt burden, due to the fiscal accommodative approach taken by both the recent TRUMP and now BIDEN administrations. Whilst the FED was DOVISH with accommodation policies as the FED moves Monetary Policy to normalization, weak dollar is being replaced by a stronger dollar. The U.S. equity market is now also under pressure with USD strength as equities sell off as accommodative monetary and fiscal policies are removed.
We have a FUNDAMENTAL change in play about happen.
So, what am I looking at?
World economies are debt ridden.
To work off the debt economies need to grow, and commodities play a fundamental part in this growth. Therefore, into H2 2022 and beyond, I see a real growing demand for commodities worldwide.
The USA has now played its hand via the FED, BUT... nothing has been done yet it is all hypothetical, although I have no doubt given the recent Jerome Powell Press Conference dated 26th January 2022 that the FED will act to normalize Monetary Policy.
The RBA meets on February 1st 2022.
We may see tapering by the RBA given what is happening around the world. The current Quantitative Easing Bond Purchases by the RBA is at AUD$4Billion per month, this could be reduced in size.
If this is done, this opens an interest rate hiking conversation that brings forward the current RBA 2024 policy into H2 2022!
Cutting through the “what ifs and maybes”, I believe that any strengthening of the AUD will NOT really have momentum until post Covid-19. This is simply because as already mentioned, a demand for commodities is fundamentally why I see this trade so attractive longer-term. Only then do I see this pair strengthening significantly towards my 2022-2023 goals vis-à-vis my targeted levels.
I am looking to enter long using key / critical support around the 0.6900 thru 0.7000 level. The attached charts show these levels and the opportunity for a spike off these levels.
Obviously these are negative patterns in play when we look at the charts, but my view is LONG-TERM at least a 12–18-month position and my trade set ups will reflect this view.
- We have a BEAR CHANNEL in play.
- Key support lies, in my opinion, between 0.6920 and 0.7020.
- We also have a BEAR FLAG in play with a measured move through to c.0.6770.
- We also have BEAR CHANNEL trend line support at 0.6920, which confluences at with the 127.2% Fibonacci retracement level from the recent 2022 lows (0.7000) through to the 2022 highs (0.7308).
- Long term trend line support from 2011 (11-year trend line) sits at 0.6900 which also confluences with the 50% Fibonacci retracement from the Codid-19 lows of 0.5517 in March 2020 top the highs of 0.8004 in February 2021.
- In addition, the 0.6900 level also correlates to previous horizontal support and resistance.
Q1 2022 REVIEW: