Am I wrong? Should I be bullish the Australian dollar

Market Analysis /
Greg McKenna / 17 May 2018

The Aussie dollar traded down to a low of 0.7448 yesterday after the release of the disappointing wage price index which did little to assuage the fears many hold about the outlook for Australia's consumer and household sector. 

But it has bounced back strongly since then to sit at 0.7517 this morning as traders await the release of the April unemployment and jobs data at 11.30am this morning. 

What's interesting about the bounce back is that the Aussie - along with commodity cousins the Kiwi and CAD - is that it occurred against a backdrop where the USD was so much stronger against the Euro. But the Aussie's move was absolutely consistent with the move higher in copper we’ve seen in the past 24 hours.

aud copper v1.png

As readers know I use this 10 minute Shanghai copper chart as a very short-term indicator for the direction of the AUDUSD. And what’s important here is that Shanghai copper was down around half a percent at one point in our day yesterday but it’s ended up half a percent. That, and the rally in other base metals, not to mention the basic materials sector on global stock markets has helped an otherwise friendless Aussie dollar. 

And that's the point folks. There are a number of big investors and Investment banks who believe commodities are undervalued relative to other assets. That feeds into expectations about commodity stocks - just look at BHP over the past week as an example - and that in turn feeds into my valuation metrics for the Aussie dollar. 

Now, it's worth remembering that no currency is the result of a single input model. There are always many indicators - both economic and market-based - which drive currency pairs and their movements. But, one of my favourite for the Aussie dollar is the relative performance of mining and metals shares to the overall market. 

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

Directionally this relationship has stood the test of time for the two decades or so I've been using it. And right here and right now it suggests the Aussie dollar is out of line with where investors are putting money to work in other markets.  

Now, as I've said, no currency is the result of a single factor model. So I'm not saying the Aussie is suddenly worth 81 cents. Things like the cash and bond spread with the US curve still matter, as do concerns many traders hold about the outlook for Australian households and what that might mean for growth and the RBA. 

Policy divergence still matters. 

But while risk appetite is rising again with stocks, and while commodities and commodity stocks remain a little bid perhaps the Aussie too will outperform expectations.  For a time perhaps anyway. 

To the price action then and the hold above the previous days low is important. The Aussie now needs to break 0.7445 to have any chance of the big fall that might be coming.

On the day the release of the jobs and unemployment data is ofvitall import. Support is 0.7490, 75 and then 45. Resistance is 0.7560/66. If that breaks then 76 cents, maybe 0.7630 comes into the frame. If 0.7630 gives way then we might be looking at something closer to 78 cents once again. 

Here's the weekly chart. The 0.7630 region is the trendline the AUDUSD broke down and through recently. 

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

Now, I haven't answered the question I posed myself in the headline to this note have I? No. The reason is that I don't know. I can see the chance of a retest of the trendline. I can see that investors are coming for commodity stocks and perhaps the Aussie. But there are so many headwinds I can't just take the signal this single sector gives me. 

So I'm not bullish the Aussie. But I am a touch less bearish after thinking about this.

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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