Aussie meets resistance

The Aussie Dollar met resistance at the former support level of 75 US cents, with a tall shadow on Tuesday’s shooting star candlestick pattern. Respect of resistance is likely and would warn of another test of support at 73.50. Breach of support would offer a target of 72, putting pressure on ASX stocks as international investors retreat.

AUDUSD

The Aussie tends to take its direction from commodities. At present iron ore displays a weak rally that coincides with the rally on AUDUSD. Reversal through support at 60 is likely, and would warn of a decline to 50.

Iron Ore

Broad commodity indexes like the DJ-UBS Commodity Index are consolidating in a rectangle, between 82 and 90 on the chart below. Commodities have been trending lower since 2011, as shown yesterday. Breakout above 90 is unlikely but would signal a primary up-trend. Breach of support is more likely and would indicate a decline to test support at the January 2016 low, between 72 and 74.

DJ-UBS Commodity Index

ASX 200 bearish consolidation

The big banks fell sharply on news of a new levy on bank liabilities in the latest budget. At this stage the ASX 300 Banks Index merely shows a secondary reaction. Breach of 8500, however, would signal a primary trend reversal, offering a medium-term target of 8000*.

ASX 300 Banks

* Target: 8500 – ( 9000 – 8500 ) = 8000

Resources stocks compensated, with the ASX 300 Metals & Mining Index rallying to test resistance at 2850/2900. Breakout is unlikely given the weak lead from iron ore. Reversal below 2700 remains likely and would strengthen the bear signal for resources.

ASX 300 Metals & Mining

Iron ore formed a bearish consolidation above support at $60. Breach would offer a short-term target of $50*.

Iron ore

* Target: 60 – ( 70 – 60 ) = 50

Selling of the Aussie Dollar continues, with a medium-term test of primary support at 71.50/72.00 now likely.

Aussie Dollar

Consolidation of the ASX 200 above support at 5800 is a bearish pattern. Breach would signal a correction to test primary support at 5600*. Twiggs Money Flow still indicates long-term buying pressure and only a fall below zero would warn of a reversal.

ASX 200

* Target medium-term: 5800 – ( 6000 – 5800 ) = 5600

‘Be careful what you wish for’: RBA could cause Aussie rout

From Myriam Robin at the Sydney Morning Herald:

The yield differential between 10-year US and Australian government bonds has shrunk to less than 30 basis points, the tightest in about 15 years, as the US engages in monetary tightening while the RBA appears set to keep rates steady at 1.5 per cent.

….This should be a serious concern for Australian policymakers, TD Securities’ chief Asia-Pacific macro strategist Annette Beacher told The Australian Financial Review, as many foreign investors are primarily attracted to the high-yield status of the local currency.

The Aussie Dollar has attracted investors over the last decade primarily because good fortune in avoiding a post-GFC recession enhanced Australia’s reputation as a stable economy. But the Aussie is still a commodity currency prone to boom-bust cycles. Dodging the 2008/2009 bullet was more a matter of luck than of skillful management of the economy. Without China’s massive post-GFC stimulus the Australian economy would have been smashed — along with the housing bubble — and the big four banks would have gone to the wall (or more likely been rescued by a government bailout). And the Aussie would be trading close to 50 cents, which ironically, despite the massive shock, may have put the economy in a stronger (and more realistic) position than it is today.

Source: ‘Be careful what you wish for’: RBA could cause Aussie rout