Irrational exuberance....

Irrational exuberance would be a good term to describe the AUDUSD's ascent on Friday night and this morning in Sydney.  When looking for an explanation to the sudden rise from .8600 to .8750 on Friday night I can only imagine that it is related to the poor GDP numbers out of the U.S. 

In some perverted sense now, bad is the new good.  The logic being that if the U. S. economy is under performing, then the Fed has to maintain and probably increase its rate of money printing.  This in turn will increase inflationary forces which will push commodity prices up and thus the commodity currencies are well bid.

The sting in the nettle for these commodity exporting nations is that even as their terms of trade increase their balance of payments situations worsen.  This is because as demand for exports increase so does demand for external borrowings which primarily are directed towards those exporting enterprises.  The exports are priced in USD and so are the borrowings.  Once reality strikes the world economy, and a tsunami of deflation hits, these commodity prices will fall but the debt will still be there.  Somehow the nation will have to continue to find the USD to pay the interest and principal on these loans.  The same thing happened to Mexico with oil in the early '80s.

In other words commodity currencies are prone to bubble behaviour as hot money comes into the sector.  When the market turns look out!

The AUDUSD chart still looks bearish to me.  The AUD often retraces fully before making a fall.  It did it when it was making the top at .9300.  This retracement to .8777 this morning may well be that - a retracement. 

Position wise I continue to sell the rallies.

Frank