Taking a broad look at AUD and related commodity markets we feel AUDUSD could indeed begin to make its way towards 80c.
We remain on guard for AUD to embark up a bullish break. At current levels, many are quick to point out the failed attempts AUD endured throughout 2016 when trying to move back towards 80c. Yet several indications on the chart and elsewhere do suggest that, perhaps on this occasion, it could be different.
Firstly, the trajectory of the run from the December lows was seen with very shallow pullbacks on lower timeframes and the 38.2% retracement was a simple ABC correction. The rally since then has also been seen with greater bullish momentum to suggest a breakout could be on the cards. Couple this with our near-term bearish bias on USD, then the breakout appears to be favoured.
If we switch to the close chart, then an interesting picture emerges. We are currently trading right on the 2016 high, so a close above here this week would be taken as a buy signal by some technicians (many still use close charts, including fund managers, as actual confirmation). The Fibonacci expansion levels use OHLC to project their levels and both the 100% and 161.8% fall around important levels. The 100% projection could also allow for a classic wave A=C equality, to mark the high before the long-term bearish trend resumes. This still allows for some upside first though. If we take a look at markets which share a correlation with AUD, then they also suggest an upside move could be pending.
So far, this year, Gold has outperformed all major currencies which also shows the US Dollar has been the weakest among them. So, as things stand, this does favour further upside for XAUUSD. Benchmarking Gold in currencies other than the US Dollar also allows us to compare currencies on a relative basis with the removal of the US Dollar from the equation. So, you could argue this is a purer way of assessing currency strength or weakness. For example, as Gold has appreciated by +9.2% this year against USD, yet only +2.4% in AUD, it further highlights the strength for AUDUSD as we have paired the strong against the weak.
Iron Ore has been on fire in recent months and currently sits at its highest level since Sep 2014. Whilst there have been concerns for its price to embark upon a correction and some miners and producers have also forecast power prices, for now it remains very supportive of a higher AUD.
Aluminium prices are also on a bullish run, with prices recently pushing to their highest levels since May 2015. Whilst they have corrected slightly lower, the bullish trend on aluminium remain intact and new highs are expected, which also helps support the potential for a bullish break on AUDUSD.
Copper prices also share a decent correlation with AUDUSD. The reflation trade had helped copper prices shoot higher along with bond yield, yet they now share a similar pattern of moving sideways. Whilst copper prices do not display the same bullish clues as aluminium or iron ore do for AUDUSD, they appear ready to remain supported at least. If the US Dollar remain under pressure (which we expect it will) then copper may also see a break out of range.
Wheat prices are often overlooked with AUD, although it is an important export for their economy and does share a correlation. The difference here is that wheat prices remain in a long-term downtrend although if we are to rebase prices from the Q3 multi-year lows, then the near-term trend is bullish and provides support for AUD. The correlation is far from perfect and does move in and out of sync but in recent times the positive correlation is back.
Matt Simpson | Senior Market Analyst
A certified technical analyst, combining macro themes, monetary policy and business cycles to generate Forex and commodity trade ideas.
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