Leading Indicators for the ASX
The Aussie market has been facing some headwinds recently as the bulls and the bears have been wrestling for control. Today we’ll look at a leading indicator that will give investors an edge in spotting the potential direction of the Australian market’s movements.
ASX Market
The broader Australian market is influenced by many drivers, both here and abroad. In recent times the keys drivers have been:
* The Chinese demand for commodities
* Tensions in the Korean Peninsular
* European reaction to the prospect of a new round of sovereign debt issues
* The performance of the US dollar
Investor sentiment is driven by these key influences, which in turn impacts whether investors will want to either de-risk, or get access to more risky assets within in their portfolios.
The Aussie dollar can be used as a leading indicator for the ASX market, as it reflects a composite of current market sentiment towards all the influences mentioned above. In an effort to examine what may be in store for the ASX market we have analysed its correlation with the Aussie dollar over the past couple of years.
Aussie Dollar and Australian Market Correlation
Over the past couple of years there have been a number of occasions when the Aussie dollar (AUD) has turned around and provided a leading indication of what was in store for the ASX market. As seen in the charts above, during the big market sell-off in late 2008 the AUD indicated that the Australian economy was starting to bottom in October 2008. As it turned out the ASX market continued to sell-off until early 2009, but in January 2009 the AUD again showed strength and this was a great leading indicator (by around 6 weeks) for the ASX market turnaround that took hold in March 2009.
The AUD and the ASX market then tracked each other in a strong correlation until late March 2010, when again the AUD signalled (by around 2 weeks) that the ASX market was ready for a turnaround. The AUD again started to show strength in mid-May and has actually outperformed the ASX market for the rest of this year. For the historical relationship between the AUD and the ASX market to realign, either the AUD needs to weaken or the ASX market needs to strengthen, or a combination of both.
Much has been written about the Aussie dollar’s parity with the US dollar, and in past few weeks the Aussie dollar has backed off its all-time highs (since floating back in 1983). Traders need to monitor the Aussie dollar performance near-term for some signs of a leading indication of a change in investor sentiment.
Monitoring The AUD/ASX Market Correlation
The Market Analyser software provides traders with a great tool for monitoring the relationship between the AUD and the ASX market. You can use the Chart Overlay function to produce a chart similar to this one:
The Trade
Near-term the performance of the Aussie dollar will be key as it pushes up against US parity. If it continues to lose momentum to the upside, then this could be a leading indication that the underlying strength of the Australian market may be in question, particularly in the near-term.
Sign up for a free 14 day trial of Market Analyser and try charting this pattern for yourself!
By Micheal Hevern
Head of Research
