Australia and the Endgame

John Mauldin: We wrote about Australia in a full chapter of Endgame. Their economy never really suffered in the recent debt crisis, in large part due to their growing housing market and their trade with China. If you talk to the average Aussie, they think that all is right with the world. They acknowledge a few issues but see nothing major like the rest of the world has experienced. Jonathan and I think otherwise. Their housing market is by recent standards in a clear bubble (which I know will get me a lot of email). Their banking system is dominated by foreign deposits (shades of Northern Rock, but not as bad as Iceland). They are vulnerable to a Chinese economic slowdown. I should note that Chinese GDP growth was “down” to 7.6% last quarter. That China might slow down should not come as a surprise. No country can grow at 10% forever. Eventually the laws of large numbers and compounding take over. All that being said, Australian government debt and deficits are under control. Any problems should be of the nature of “normal” business cycle recessions and accompanying issues.

Comment:~ Massive Chinese stimulus saved Australia from the GFC but that is no reason to become complacent. As Steve Keen recently pointed out, Australia is in a similar position to Spain in 2006. Spain was generating a fiscal surplus which it used to reduce government debt below 40% of GDP, but its banks were exposed to a large housing bubble funded by offshore deposits. Australian banks are similarly exposed to offshore funding and are leveraged 50 to 1 on residential mortgages (Macrobusiness May 4, 2012) — even after adjusting for mortgage insurance — leaving them highly vulnerable to a contraction. We also need to recognize that Australia is not exposed to a slowdown in China’s GDP growth, but to a slowdown in Chinese spending on infrastructure and housing. While GDP growth may fall to zero, the Chinese economy will still survive, but what are Australia’s chances if that is accompanied by say a 50 percent fall in new infrastructure and housing projects? The fall in iron ore and coking coal exports would have a far greater impact on the Australian economy.

Forex: Euro, Pound Sterling, Canadian Loonie, Australian Dollar and Japanese Yen

The Euro broke medium-term support at $1.23, signaling a test of the 2010 low at $1.19/$1.20. Declining 63-day Twiggs Momentum warns of a strong down-trend. Breach of the 2010 low becomes likely if the ECB had to indicate an intention to directly or indirectly purchase government bonds — and would suggest a long-term decline.

Euro/USD

Pound Sterling broke through €1.26 against the Euro and is now retracing to test the new support level. Rising 63-day Twiggs Momentum indicates an accelerating up-trend. Respect of support is likely and would offer a target of €1.29.

Pound Sterling/Euro

* Target calculation: 1.26 + ( 1.26 – 1.23 ) = 1.29

Canada’s Loonie is weakening against the Aussie Dollar but long-term bullish divergence on 63-day Twiggs Momentum (and breach of the descending trendline) warns of reversal to an up-trend. Breakout above parity would confirm.

Canadian Loonie/Aussie Dollar

The Aussie Dollar broke support at $1.02 USD and its recent broadening wedge on the 2-hour chart. Expect a decline to $1.01; confirmed if short-term support at $1.015 is broken.

Aussie Dollar/USD

* Target calculation: 1.02 – ( 1.025 – 1.015 ) = 1.01

A long-term chart shows the US dollar forming a bottom against the Yen after long-term bullish divergence on 63-day Twiggs Momentum and breach of the descending trendline. Breakout above the current descending trendline and resistance at ¥80 would indicate another test of ¥84/¥85, while breach of that level would confirm a primary up-trend.

Aussie Dollar/Japanese Yen

* Target calculation: 84 + ( 84 – 78 ) = 90

Basel takes aim at Mega Bank | | MacroBusiness

Deep T: As the research previously posted here on MB shows, Mega Bank [the big four Australian banks: NAB, CBA, WBC and ANZ] carries a level of capital against residential mortgages that is less than 2% even with mortgage insurance. Mega Bank uses internal risk based models to determine the amount of capital which are primarily based on the historical default rate of Australian mortgages relative to loan to value ratios. The period over which Mega Bank assesses the historical default rate is primarily over a period of rising house prices fueled by the expansion of mortgage credit by Mega Bank. Thereby masking probable default levels over a more benign period…..

via Basel takes aim at Mega Bank | | MacroBusiness.

Forex: Euro, Pound Sterling, Canadian Loonie, Australian Dollar, Japanese Yen and South African Rand

The Euro broke support at $1.25 before falling sharply through $1.24, warning of another decline. Narrow consolidation below the new resistance level is a bearish sign. Follow-through below $1.23 would offer a target of $1.20.

Euro/USD

Pound Sterling broke resistance at €1.25 against the Euro, offering a target of €1.28.

Pound Sterling/Euro

* Target calculation: 1.250 + ( 1.250 – 1.215 ) = 1.285

Canada’s Loonie is strengthening against the US Dollar on the back of rising oil prices. Expect another test of $1.02.

Canadian Loonie/US Dollar

The Aussie Dollar threatens to break down from its recent flag formation. Failure of support at $1.025 would suggest a test of $1.01.

Aussie Dollar/USD

The Aussie Dollar continues to range between ¥72 and ¥90 Japanese Yen. Dips are getting shorter and range traders may need to move their base to ¥75.

Aussie Dollar/Japanese Yen

Against the South African Rand, the Aussie Dollar is testing resistance at R8.50. Breakout would offer a target of R9.00. Narrow consolidation above R8.30 would be a bullish sign.

Aussie Dollar/South African Rand

* Target calculation: 8.50 + ( 8.50 – 8.00 ) = 9.00

Australian Dollar

The Aussie Dollar is forming an ascending flag after breaking resistance at $1.02 on the 2-Hour chart. Reversal below $1.025 would retrace to at least $1.01, while upward breakout from the flag would offer a target of $1.05*.

Australian Dollar/USD

* Target calculation: 1.03 + ( 1.02 – 1.00 ) = 1.05

Australia: ASX 200

The ASX 200 continues to range between 3900/4000 and 4150. Twiggs Money Flow (21-day) oscillating  around zero indicates uncertainty. Narrow consolidation below 4150 would be a bullish sign and breakout would test the May high of 4450. Reversal below 3900/4000 is less likely but would warn of a primary decline.

ASX 200 Index

Forex: Euro, Pound Sterling, Australian Dollar and Canadian Loonie

The Euro retreated below support at $1.26, indicating a test of the 2010 low at $1.19/1.20. Breach of the rising trendline on 63-day Twiggs Momentum would strengthen the bear signal.

Euro/USD

Pound Sterling is testing resistance at $1.58 against the greenback. Respect would indicate  another test of primary support at $1.52. A 63-day Twiggs Momentum peak below zero would warn of a primary down-trend.

Pound Sterling/USD

* Target calculation: 1.53 – ( 1.63 – 1.53 ) = 1.43

Against the Euro, Pound Sterling is in an accelerating up-trend. The gap between the recent low at €1.225  and the previous peak at €1.215 suggests strong buying pressure — as does 63-day Twiggs Momentum oscillating high above zero.

Pound Sterling/Euro

* Target calculation: 1.250 + ( 1.250 – 1.215 ) = 1.285

Canada’s Loonie is strengthening against the Aussie Dollar. Long-term bullish divergence on 63-day Twiggs Momentum warns of reversal to a primary up-trend. Breakout above parity would confirm.

Canadian Loonie/Aussie Dollar

* Target calculation: 1.00 + ( 1.00 – 0.96 ) = 1.04

Short retracement suggests that the Aussie Dollar is, in turn, strengthening against the greenback on the Daily chart. Breakout above $1.02 (and the descending trendline) would indicate that a bottom is forming. Recovery of 63-day Twiggs Momentum above zero would suggest a primary up-trend.

Aussie Dollar/USD

* Target calculation: 1.02 + ( 1.02 – 1.00 ) = 1.04

Australia: ASX 200

A monthly chart of the ASX 200 shows how the index tends to peak ahead of the CRB Commodities Index and Australian Dollar but then fall in step with them from there on. The ASX 200 was first to reverse direction in 2011 but commodities now lead the way. Expect Australian stocks — and the Aussie Dollar — to follow commodities lower. Breach of primary support at 3850 would offer a target of 3200*.

ASX 200, CRB Commodities Index, AUDUSD - Monthly Chart

* Target calculation: 3800 – ( 4400 – 3800 ) = 3200

On the daily chart, breach of support at 3980/4000 would signal a test of primary support at 3850. Reversal of 21-day Twiggs Money Flow below zero, warning of medium-term selling pressure, increases the likelihood of a downward breakout.

ASX 200 Index

* Target calculation: 4000 – ( 4150 – 4000 ) = 3850

A tilt in Australian liberalism | MacroBusiness

Houses and Holes: As I have noted in the past that, for the most part, Australian political economy is divided pretty simply into two teams. On one side you have a kind of bastardised social liberalism in which trade union thugs wield power via the Labor Party and are supported by a cultural community of Irish-Catholic derived “battlers”. On the other side, you have an equally bastardised neo-liberalism in which corporations wield power via the Liberal Party and are supported by a cultural community of English-Protestant derived “bludgers”. Whether the members of either team are from Vietnam, Israel, Lebanon or Lapland, rich or poor is irrelevant. This is our tribal political culture……

via A tilt in Australian liberalism | | MacroBusiness.

Forex: Europe, Australia, Canada, South Africa and Japan

The Euro is testing its new resistance level at $1.26. Respect would offer a target of $1.17*. Bullish divergence on 63-day Twiggs Momentum, however, warns that the down-trend is weakening; recovery above zero would suggest reversal to a primary up-trend. Breach of the descending trendline would strengthen the signal.

EUR/USD

* Target calculation: 1.26 – ( 1.35 – 1.26 ) = 1.17

Pound Sterling displays a strong up-trend against the euro, again testing resistance at €1.25. Breakout would signal an advance to €1.30*. 63-Day Twiggs Momentum oscillating high above zero indicates trend strength.

GBP/USD

* Target calculation: 1.26 + ( 1.26 – 1.22 ) = 1.30

The Greenback has corrected sharply against the Japanese Yen before finding medium-term support at ¥78. Recovery above ¥80 (and the descending trendline) would indicate that the correction is over, while breach of support would test primary support at ¥75.50/76.50. The long-term bullish divergence on 63-Day Twiggs Momentum continues to warn of reversal to an up-trend.

USD/JPY

* Target calculation: 84 + ( 84 – 78 ) = 90

Sharply falling crude oil prices have weakened Canada’s Loonie relative to the Aussie Dollar. Against the greenback, the Loonie bounced of short-term support at $0.96 but this is unlikely to last and we should expect a test of primary support at $0.94/0.95. A 63-day Twiggs Momentum peak below zero would warn of a primary down-trend.

Canadian Dollar

* Target calculation: 0.96 – ( 0.98 – 0.96 ) = 0.94

The Aussie Dollar lifted along with commodity prices and is headed for a test of $1.02 (USD). Upward breakout would signal an advance to $1.08, while respect of resistance (and the descending trendline) would warn of a decline to $0.90*. A 63-day Twiggs Momentum peak below zero would strengthen the bear signal.

Aussie Dollar

* Target calculation: 0.96 – ( 1.02 – 0.96 ) = 0.90

The Aussie Dollar is headed for a test of resistance at R8.50 (South African Rand). Breakout would offer a target of R9.00*. Reversal of 63-Day Twiggs Momentum below zero, however, would warn of a primary down-trend.

Aussie Dollar/South African Rand

* Target calculation: 8.50 + ( 8.50 – 8.00 ) = 9.00