BUYING OF AUSSIE DOLLAR SHOWS MORE GLOBAL OPTIMISM -- AUSTRALIAN ISHARES ALSO HELP LEAD GLOBAL STOCK BOUNCE -- AUSSIE MARKETS ARE CLOSELY LINKED TO CHINA AND COMMODITY PRICES
AUSTRALIAN DOLLAR RALLIES... Currency trends often us something about the mood of global traders, and which way they're starting to lean. In the ongoing battle between "risk-on" and "risk-off" trades, one of the markets worth keeping an eye on is the Australian Dollar. For a number of reasons, global traders buy the Aussie when they're turning more optimistic on global stocks and commodities. That's why the recent upturn in the Aussie Dollar may be a sign of a bit more optimism among global traders. Chart 1 plots the Australian Dollar (XAD) against the U.S. Dollar over the last eighteen months. The XAD has been trading sideways over the last year. After holding above its October low, however, the XAD has just reached a new three-month high against the U.S. currency. It's done even better against the Euro. Chart 2 shows the XAD soaring to a record high against the Euro. Chart 3 shows it also bouncing against the Japanese Yen (more on that later).
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Chart 1
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Chart 2
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Chart 3
AUSTRALIA ISHARES ALSO RALLY... Australian iShares are also ralling along with its currency. I recently noted that foreign stocks were testing an important "neckline" drawn under 2010-2011 lows which put them in a critical support zone. Chart 4 shows Australian iShares (EWA) bouncing sharply off that support line. The EWA:$DJW ratio (below chart) shows that Aussie iShares are rising faster than the Dow Jones World Stock Index (DJW) (up arrow). Despite the recent bounce, the EWA is still in a trading range between its late 2011 low and its 2012 high (see trendlines). It still needs to clear the upper line to turn its chart bullish. What the EWA does from here has a lot of implications for other global stock markets, including China.
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Chart 4
AUSSIE LINK WITH CHINA... Australian markets have very close ties to China. Australia is one of the world's biggest producers and exporters of natural resources (commodities). China is the world's biggest buyer of those resources, and especially from Australia. It's no surprise then to see the close correlation between their two markets. Chart 5 compares Aussie iShares (blue line) to China iShares (red line) over the last five years. It's clear that they rise and fall together. Their six-month Correlation Coefficient (below chart) is currently at .89, which is very high. [The only departure from that positive correlation occured during the first quarter of 2011 when Chinese shares turned down first. They recoupled shortly thereafter]. Chart 5 shows both markets stabilizing above their October lows (see trendlines). Aussie shares are stronger. But they may be hinting at stronger Chinese shares. For any meaningful global rally to develop, both markets need to rise a lot more.
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Chart 5
AUSSIE DOLLAR LINK TO COMMODITIES... The direction of the Aussie Dollar also impacts commodity prices. Chart 6 compares the Aussie Dollar (green line) to the CRB Index (brown line). You can see their positive correlation. The ability of the XAD to bounce off its October low has created a "positive divergence" between it and the CRB Index. That suggests that the commodity selloff is overdone and due for a rebound. It may even be signalling a commodity bottom. One of the commodities that has a strong historical tie to the Aussie Dollar is copper. Chart 7 shows that both markets have similar price trends. Both peaked together last summer, bottomed during October, rallied into this spring and then corrected. Both have bounced off their October lows (see trendlines). Recent messages have shown copper prices testing major support along with crude oil and gold. A strong Aussie Dollar could help all three markets. That's why commodity traders should keep an eye on the direction of the Aussie Dollar. So should stock traders.
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Chart 6
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Chart 7
AUSSIE/YEN TRADE IMPACTS STOCKS ... The relationship between the Aussie Dollar and the Japanese yen also tells us a lot about the mood of global traders. While the XAD is viewed as a ''risk-on" trade, the yen is just the opposite ("risk-off"). The orange line in Chart 8 is a" ratio" of the XAD divided by the yen ($XAD:$XJY). The blue line is the Dow Jones World Stock Index (DJW). Notice how closely the two lines track each other. When the XAD/XJY ratio is rising (2002 to 2007 and 2009 to 2011), traders favor the Aussie Dollar over the yen. They also favor stocks. During the crash of 2008, money poured into the yen as a safe haven play, as they sold the Aussie and stocks. During 2009, they left the yen for the Aussie and returned to stocks. That makes the Aussie/yen ratio a good barometer of global stock market direction. When traders are more optimistic, they buy the Aussie and sell the yen, which is what they've been doing lately. Chart 9 shows the same two lines over the last eighteen months. The correlation is striking. The ability of both lines to bounce recently is encouraging. But they'll have to rise a lot more to turn things around for the better.
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Chart 8
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Chart 9
AUSSIE AND CDW ARE LINKED... The Canadian Dollar is another key global currency for most of the same reasons as the Aussie Dollar. Canada is another big exporter of commodities. Its currency also has a close link to commodities. It also has a close correlation to its own stock market (which, in turn, a closely linked to the U.S. stock market). Chart 10 compares the two commodity currencies. Although the Aussie Dollar has been stronger over the last year, both have similar chart patterns. It's also encouraging to see both bounce off their October lows. Let's hope those bounces last.
