The Australian dollar is holding up but stocks and copper suggest further falls ahead

Market Analysis /
Greg McKenna / 29 Jun 2018

While the Euro holds 1.15 the Aussie looks okay.

And at 0.7348 AUDUSD is a tiny bit better bid than it was this time yesterday after it again made a low in the 0.7320's overnight. 

The question, of course, is whether it's building a base or just pausing before a full capitulation toward 0.7220 and then the 0.7125/50 target I hold. 

And as I wrote in markets Morning earlier, the headwinds I have been writing about are unchanged. But the Greenback is a big factor in the Aussie’s outlook and on that front it seems to need further impetus to drive it higher and the Aussie dollar down. 

To me, the market is still underpricing the strength of the US economy and thus the real policy and economic divergence that is coming down the pipe between the US and other nations. With the CESI for the US slipping below 0 (-2.3 this morning) for the first time early October 2017 the Greenback needs strong data in the next week to support it. 

Failing that the Aussie could find its feet and have a decent counter-trend rally. But that’s what it would be, countertrend.

To that end this morning I've seen some elevated chat about the recent reversal in copper and what it might mean noting "for those interested in the and perhaps growth this could be an interesting indicator if it really breaks down". PLB's target is $2.58 a pound. 

Source: Twitter Screenshot
Source: Twitter Screenshot

What's interesting about that is there are others sharing a chart of the recent relationship between the price of copper and the S&P 500. 

It's very short term.

Too short term to be relevant because the longer term relationship is nowhere near as strong.

But perhaps the correlation is strong because there is actually a decent causal narrative in the stocks and copper fall in recent weeks. China, Chinese growth, he funk in Chinese stock and currency markets, trade tensions, and thus the outlook for the Chinese and global economies. 

Naturally, that impacts risk appetite - stocks negative - and earnings - also stocks negative. 

So I'm not going to say copper is a great real-time indicator for stocks in the long run. But I am going to say this relationship might be telling us something about where investors and traders are starting to see the outlook for the global economy and markets. 

And that has implications for the Australian dollar. 

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

So if copper and stocks continue to drop the Australian dollar will be caught in a negative feedback loop of weak commodity prices and risk appetite. It's likely to be an environment where the positives of a strong economy and the Fed tightening cycle give the US dollar support. 

That suggests, as I highlighted above, any AUDUSD rally is corrective in nature and the outlook is for further weakness. 

To the charts then. The monthly and weekly charts both point to lower levels. So far the low has - for the second week in a row - been on the bottom of this inside downtrend. Overall though the bias remains lower as the downtrend remains intact. 

On the day 0.7359/64 looks to be a critical level for me with 0.7384 above that the key to a run back toward 74 cents. Overall though the downside still beckons through time.

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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