The Aussie dollar has been holding up remarkably well for the past couple of years in the face of a weakening commodity price environment.
If you look at the chart below you can see how high the correlation has been for the past six years between the Australian dollar and the CCI (Continuous Commodity Index):
I think it’s very interesting to note the large divergence that’s now opening up between the two. In today’s Money Morning I’ll explain why…
The CCI has been trending down steadily for the past two years, but the AUDUSD has broken away from that downtrend and is instead treading water.
The obvious answer is that Australia’s high interest rate environment is seeing money flow into the Aussie dollar, and that’s counteracting the selling force from weakening commodity prices.
But Australia has begun lowering interest rates aggressively and there will be more cuts in coming months. The way I see it, the interest rate differential will contract between Australia and elsewhere so the current buying support may not last much longer.
I would expect to see the divergence between the CCI and the AUDUSD to contract over the next few months. My guess is that the AUDUSD will sell off to meet the CCI rather than the other way around.
I think the long term chart of the Australian dollar is looking a little tired. I’ve circled on the chart below every time the 10 week moving average has crossed the 35 week moving average on the downside. You can see quite clearly that a multi-month sell-off often ensues after this long term trend signal is triggered:
AUDUSD Daily Chart
The uptrend from 2009-2011 has been broken since mid-2011, but the Australian dollar is still holding its head above the 2008 high of US$0.985.
I have mentioned this level a lot in the past. It really is the line in the sand for the Aussie dollar from here.
You can see quite clearly that it has bounced from this zone over the past few years. There are three instances where the Australian dollar looked to have broken beneath that level, only to shoot higher within weeks of testing this major support. I fear it will be fourth time unlucky the next time the Aussie dollar goes beneath US$0.985.
There will be two and a half years of buying that will be out of the money below US$0.985c. I could imagine seeing the AUDUSD falling quite quickly to the low 90′s or even high 80′s once the tide turns.
Obviously we would need some more negative news out of China, which would place some more downward pressure on commodities, before the AUDUSD snaps. My colleague Greg Canavan has been putting a huge amount of work into a new white paper on the upcoming china bust and the impact that will have on the Australian dollar. You should definitely have a look.
Murray Dawes
Slipstream Trader
From the Port Phillip Publishing Library
Special Report:
After the Bust
Daily Reckoning:
Riding out the Storm
Money Morning:
How the Aussie Dollar is Caught Up in Big Bankers’ Games
Pursuit of Happiness:
Look Out for Melbourne’s Body Snatchers
