Rudi’s View: Banks And USD Showing The Way

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

By Rudi Filapek-Vandyck, Editor FNArena

I am a close follower of the currency markets, as are other market followers. Such as, for example, the team of technical commodities analysts at Barclays Capital. Their main focus may be what is happening on price charts for crude oil, copper or platinum, but FX crosses are never far away during their daily routine.

There's a good reason for this too given currency markets have been at the forefront of global developments through the 2007-2010 boom-bust-recovery process.

For those who haven't read my past stories, or simply failed to pay attention to the close connection between currencies and risk appetite over the past years, here's one simple rule to follow: US dollar down is good, US dollar up is not good.

Of course, at some stage this inverse correlation between the greenback and risk assets will break down, but it hasn't thus far and I don't think this is something to happen in the short term.

The euro threatened to break below US$1.32 today, which explains why Asian share markets, including Australia, are weaker today. Is it only my memory, but it seems like yesterday when the euro came down from 1.50 to 1.40?

The reason why I mentioned Barclays technical analysts in this story is because of their update on the euro this morning. It does not make for bullish prospects for risk markets. Now that the euro has fallen below key support at 1.33, the team is talking about the European currency “looking into the abyss”.

If the euro stays below 1.3310/1.3267, report the analysts, the next target will shift to 1.2930. However, that is not where they think the euro slide will come to an end. “Bigger picture, however, a move below the monthly clouds would be a first since October 2002, pointing to an eventual push towards the 2008 lows at the 1.2315 area.”

Craig Ferguson, strategist at hedge fund Antipodean Capital, whom I know also follows currency markets very closely, used Australian financials this week to warn his clientele for a pending sell-off. This in particular caught my attention as I have developed my own gauge for investor optimism, as reported several times in the past, and my own market indicator specifically involves the Big Four banks in Australia.

In short: compare share prices for the Big Four with their average price targets and when both meet ask yourself the question: what are the chances that securities analysts will start lifting their targets anytime soon? If the answer is negative, the share market has run too far ahead of itself.

Earlier this month I pointed out share prices for CommBank ((CBA)) and Westpac ((WBC)) had come eerily close to their average targets. This week they moved beyond. ANZ Bank ((ANZ)) was not far behind. The only one missing in action was National ((NAB)) but we all know NAB is the present laggard in the sector.

So was the market going to wait until NAB had gone past the average target too? It's always difficult to time these things and my simple indicator has proved very effective throughout the years, but it doesn't generate an exact timer.

Bank shares are down two days in a row though and more should be expected, predicts the aforementioned Craig Ferguson. Using a combination of technical calculations and chart formations, Ferguson predicted on Thursday Australian bank shares are now looking at losing between 7 and 12% of their share price peaks achieved in April.

And that is the more positive scenario. It is possible bank shares will lose all gains made since February, predicts Antipodean.

There is no mentioning of a broader impact for the share market as a whole, but those who have been reading my stories about the bank stocks indicator throughout the years know I always make the wider connection. If Big Four banks indicate overall optimism has run too high, this is likely the case for BHP Billiton, Rio Tinto, Woodside Petroleum and others as well.

If Antipodean's prediction proves correct, expect the ASX200 to fall to support at 4800. At the very least.

All Antipodean charts courtesy of Etrade.
Enquiries for becoming a subscriber to Antipodean Capital research can be sent to: info@antcap.com.

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