Through a night of US dollar strength the Aussie hung tough

Market Analysis /
Greg McKenna / 24 May 2018

The Australian dollar is opening the day a little better bid this morning after showing uncommon resilience overnight as stocks dipped, the US dollar surged, and copper fell close to 2%. 

With the Euro and Pound breaking down and making new lows for this run it was the perfect setup for the AUDUSD to make a run toward and probably through 75 cents. 

Yet it didn't, the low was 0.7523 and the Aussie sits back at 0.7564 against the USD and at 83.20 in AUDJPY terms. 

Of course, it wasn't just the Aussie dollar that outperformed the bigger majors. along with the CAD, and Kiwi it was the strongest of the G10 currencies in the past 24 hours.

Why that is not easily judged given all of the above. Though it is worth noting mining and mineral shares continue their mild outperformance of the overall MSCI global stock market index. That tells me there is residual support for the investment theme which says that commodities are undervalued relative to financial and other assets and as such it is a source of support for miners and – by extension – the Aussie dollar as it approaches recent lows.

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

I've been asked why I use this ratio and not just straight commodity prices or an index of commodities. My answer is that when I look at currency markets and forex pairs it is my habit to look at economic as well as "investment" fundamentals. 

By that I mean indicators that will either drive real money flows or represent a flow of real money. To that end how metals and mining shares perform relative to the overall market is a neat way of seeing where real money is placing their bets in stock markets on the cycle which resonates with Australia and the Aussie dollar. 

Naturally, readers know it is not the only driver in my "model". But it is an important one. And it's a relationship which suggests that even though I am on balance bearish the Aussie on a 3-6 month time frame there is a chance of a decent bounce if this ratio is any guide. 

S0 throw in the dovish read by the market of the Fed minutes (for more see Markets Morning) you end up with an Aussie dollar which has rallied from a low of 0.7523. That level is now support along with the 0.7540/43 level on the day with resistance at 0.7573, 80/83, and then 0.7603.  

Here's the daily chart - a trend, within a trend, within a trend.

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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