If copper is any guide it's time for the Australian dollar to roar higher

Market Analysis /
Greg McKenna / 07 Jun 2018

The Aussie dollar did best of the Majors over the last 24 hours. It's sitting at 0.7669 up around 0.7% day on day. 

But it is stuck below a confluence of technical resistance that traders are clearly eying. I'll get to that, and yesterday's GDP a little later in this note. 

For the moment though I want to focus on coppers break out and the impact on the AUDUSD - indeed on risk assets more broadly. 

Copper has been dancing around in a range for a while now. But as I highlighted in my video on Monday - where I look at the weekly set up - a break of the top of this wedge formation would see it run hard. That's what we have seen over the past few trading days as copper has leaped from $3.08 at the close last Friday to $3.26 this morning. 

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

It's now back into the zone just a few cents below the 2017 highs which are themselves the highest level since 2014. These levels, around $3.29/30 are also the 50% retracement of the fall in the copper price from 2011 to 2015. 

Big levels. 

So copper may find the air a  little thin up here. And a big part of the rally centered around some concerns about supply from Chile. 

But, I've spent all this time on copper because for me it is my most important short-term and coincident indicator for the Aussie dollar when I am trading. Indeed I use copper - both Shanghai and Comex - as a directional lead or confirmation/disconfirmation of Aussie dollar moves. 

Check out the hourly chart over the past 6 months of Comex Copper (HGc1) and the AUDUSD. 

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

And on that basis, there is every indication that if the April trade data to be released by the ABS in Australia today does print the $1 billion surplus, or better, that economists are looking for it might be enough to see the Aussie break resistance. 

Backtracking a little though to yesterday's GDP the key for the Aussie dollar is that the strength - 1% qoq and 3.1% yoy for Q1 2018 - forestalls any chance of an RBA rate hike anytime soon. Even more importantly it reinforces that once again the RBA's positive outlook on growth has proved correct. 

It doesn't mean there'll be a rate hike anytime soon. But it does suggest the RBA will continue to reconfirm the next move in the cash rate is higher. 

That takes away a small negative for the Aussie. 

Throw in this counter-trend move in the USD and the topside might open up.  That depends on tthe technicalsthough. 

Last night’s high of 0.7673 is now the key – if that breaks we can head toward 0.7724 and if that breaks we are back at 78 cents. Two big questions, and trade today will be important, is a data based sentiment shift underway at the moment and is the US dollar weakness set to continue to allow the Aussie dollar and commodities, a change of fortune? My answer to both is yes – for the moment. But this area looks solid technically so if the Aussie fails up here we’ll see it back toward 0.7620/30.

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

Have a great day's trading.

Greg McKenna

Chief Market Strategist


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