Recently, I have been focused on the US Dollar, searching for evidence that supports or negates the interpretation of further weakness. It makes total sense to closely follow the USD given the impact it has on bonds, stocks and commodities both individually and collectively. Now that the next leg lower in the Dollar Index is underway, I thought I should shift my focus to another extremely important currency.
The Aussie Dollar.
The Aussie is loaded with information and implications. Australia is one of the world's largest commodity producers, so it's currency is heavily influenced by commodity prices. It's also closely tied to China, one of the largest emerging market economies. It even serves as a proxy for global risk sentiment.
Let's look at a few charts to gauge the Aussie Dollar's recent performance, and to see what broader market implications we can glean from the information.
The proxy for risk-on/risk-off sentiment is best seen in the AUD/JPY cross. When the AUD is outperforming it's risk-on. When the Yen is outperforming it's risk-off. Notice a clear area of resistance dating back to the summer of 2019. Price has now broken above that area of resistance, displaying strength in the AUD and global risk appetite.
A very similar pattern can be seen in the AUD/USD cross. The main difference here is that the AUD seems a little stronger against the USD than the Yen. A similar area of resistance, as mentioned above, clearly became support in the AUD/USD as price convincingly moves higher.
Honestly, this chart of the EUR/AUD is what sparked my interest in the broader performance of the AUD. It made sense that the Aussie was gaining against the USD. Most currencies are right now. However, if the Aussie Dollar starts to trend against other major currencies, then that information strongly supports the developing thesis of global growth and higher commodity prices.
I couldn't help but notice that price action has laid down on support, and that level looks sticky. This leads me to believe that support will be broken.
It appears the GBP/AUD is forming a H&S pattern with a clear neckline. A break and close below 1.7540 would complete the pattern, and add to the list of currencies weakening against the AUD.
Instead of continuing to rip through a number of other charts, which I often like to do, I decided to put together an equally-weighted index of all the DXY constituents, including the USD, against the Aussie Dollar.
It looks a lot like the AUD/JPY chart. It also shows that AUD basing and breaking out against the USD and Yen are not isolated events. This confirms an increasing potential for broad Aussie Dollar strength.
Of course, I couldn't leave out the BRICS currencies. Below is an equally-weighted index of the AUD against the major emerging market currencies.
The Aussie Dollar recently broke out of a four year consolidation, and is now forming a flag-like pattern well above the former area of resistance. If the AUD is going to start to broadly outperform the world's currencies, it's probably gong to start with the weaker ones. This is exactly what has happened.
After reviewing the charts, it becomes clear that the AUD is beginning to show strength against a broad swath of currencies. This not only supports an increase in global risk appetite, seen in the AUD/JPY, but also points to higher commodity prices and global growth. This is just more evidence to reinforce conviction in the "reflation trade."
As with any area of the market things can change, and we need to be prepared for those changes and the implications they bring. But for now we have a handful of charts that can help support or call into question our market thesis. We can't ask for much more.
Thanks for reading! If you have any questions or comments, please feel free to contact me at ianculley@culleycharts.com
DISCLAIMER: All information and opinions expressed by Culley Charts are strictly that, and should not be construed as investment advice. Market participation comes with inherent risk, and the responsibility of managing this risk lies solely with each individual investor.
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