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A perfect storm is brewing for the Australian dollar but it might be time for a bounce

Market Analysis /
Greg McKenna / 20 Jun 2018

The ducks are lining up for a lower Australian dollar in what looks like a perfect storm of negative drivers building on the horizon. 

Whether it is the utter collapse in the China CESI, with the 100 point runaround in the past 4 weeks from ~+50 to ~-50, whether it is the rotation out of metals and mining stocks into more defensive assets, whether it's the trade war, or whether it is the more specific drivers like the Australian economic outlook, households, consumption, and a more cautious RBA, the outlook for the Australian dollar has darkened.    

 

Click on me, I'll expand
Click on me, I'll expand

 

Indeed it is possibly this rotation out of metals and mining shares and the underperformance they are suddenly again showing versus the total MSCI world index which highlights that traders and investors are actually allocating money away from assets that were set to benefit from the global growth upswing. 

Clearly, this is only a directional and indicative relationship with the Aussie dollar. But it is one that has an important place in my toolkit. That's especially the case when metals and mining shares appear to be getting sold as a response to the desynchronisation of global growth and worries that this escalating trade war will hit global growth further. 

And I haven't mentioned technicals yet. To that end the close below 74 cents opens up the way to an eventual move toward 0.7125/50. That's something I've been writing recently. 

Click on me, I'll expand
Click on me, I'll expand

But as you can see in the weekly chart the low overnight was pretty much on the bottom of the current short-term downtrend - one of them anyway - which suggests both that other traders are watching this line and also, when combined with the four hour chart, that a bigger bounce is in the offing. 

I say that also because what we saw yesterday was very much a catalyst driven move. US tariffs, Chinese response, stories, tweets, and a frenzy about all of it was what drove prices. So the question is where's the next catalyst, and if there isn't one, then the very short term oversoldness of the Aussie - and others - suggests a countertrend bounce is in the offing. 

Click on me, I'll expand
Click on me, I'll expand

The chart above, the 4-hour, is my version of Kathy Lien's Double Bollinger Band strategy. It's a cracker and while it remains the case that now we’ve seen a day close below 74 cents the 0.7125/50 region is my target.

But for the shorter term minded it is worth noting the AUDUSD might bounce a little back to 74 cents, perhaps even 0.7408 or yesterday’s high at 0.7425. If 0.7425 breaks then we could see 74.50 and 0.7477 in short order. 

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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