Posts Tagged ‘us dollar’

Leading Indicators – Aussie Dollar and the ASX Market

Friday, December 3rd, 2010

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

Australian Dollar and Australian Market Correlation

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 AUD/ASX Market Correlation

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

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Stock Market Analysis: Australian Markets – The Next Catalyst

Friday, October 22nd, 2010

The Australian markets have had a great run in the past couple of months, but the wary trader should be looking to identify leading indications of any turnaround in investor sentiment. In this article we examine inter-market interaction for possible indicators of what lies ahead.

One such indicator is the Aussie dollar, which has finally reached parity against the US dollar. It’s strongly correlated to commodities prices and has been surging since May this year. The Aussie dollar’s strength and the corresponding US dollar’s weakness have driven commodities prices higher, underpinning the performance of our resource stocks. These in turn have been the driving force for our markets since the recovery began back in March 2009.

The surging commodities prices have driven domestic and overseas investments in our resource stocks, particularly in our second-tier miners which offer significant growth potential. However, with the exception of the consumer staples sector, all our other market sectors have been underperforming. This leaves the Australian market susceptible to a pullback if the mining sector falters.

Ahead of the G-20 meeting the US Treasury Secretary, Timothy Geithner, said the major currencies are “roughly in alignment now”, suggesting there is no need for further US dollar weakness. This may trigger a change in market fundamentals near term, with traders and commodities speculators enjoying a free ride on the back of the weakening US dollar.

A move away from the weak US dollar policy will mean that the Aussie dollar is set to pullback. Let’s take a look at what this means to commodities and our stock market performance.

The Big Picture

Over the past decade there has been a strong correlation between the strength of the Aussie dollar and the Aussie market as shown below: the Australian market is shown in red and the Aussie dollar in blue.

Comparison performance of Aussie Market (red) and the Aussie Dollar (blue)

It is worth noting that the last time the Aussie dollar was around parity was back in mid-2008. At that time the markets fell sharply once there was a turnaround in the US dollar’s strength, which continued until the bottoming of the markets in March 2009.

In recent times there has been a divergence in the relationship between our market and the currency which has lasted a few months. Historically any divergence has been resolved within 4 to 6 months, either by the Aussie dollar weakening or the Aussie market strengthening.

Inter-Market Relationships Since the Global Financial Crisis

Since mid-2008 there have been two clear periods of divergence prior to now. The first was in late 2008 which was resolved in the ultimate market bottom of the GFC in March 2009. The second was in early 2010 where the ASX200 continued to rise but the Aussie dollar failed to make new highs. This resulted in the sell-off in April this year.

Aussie Market and Dollar performance since the GFC bottom.

Aussie Market and Dollar performance since the GFC bottom.

Over the past few months the Aussie dollar has surged, but the market has failed to participate in the bullish sentiment. As noted previously, historically any divergence has been resolved within 4 to 6 months, either by the Aussie dollar weakening or the Aussie Market strengthening.

The Commodity Currency

The performance of the Aussie dollar is closely tied to the price of commodities, as shown below. This relationship has held tight since the GFC. The CRB Commodities Index, illustrated below, comprises an index of a basket of commodities.

Performance Comparison Between Aussie Dollar and the CRB Commodities Index

Performance Comparison Between Aussie Dollar and the CRB Commodities Index

The Aussie dollar is referred to as a commodity currency, because our economy is so dependent on the export of commodities and is frequently bought up when investors look to add risk to their portfolio.

Conclusion

The Aussie market is being driven by the performance of our resource stocks which we highlighted in our recent Quarterly Market Performance Review. The other market sectors (with the exception of the Consumer Staples sector) are all underperforming.

We have shown in this article that market relationships and thereby investor sentiment may be due for a turnaround. The divergence in the performance between the Aussie dollar and the Aussie market will need to be resolved within the next 6-8 weeks, as there appears to be an imbalance between the bullishness over the Aussie dollar and the performance of the share market. The comments from the US Treasury Secretary suggesting there is no need for further US dollar weakness may be the trigger for a change in market fundamentals near term, as this will hurt commodities prices and in turn our miners and stock market going forward.

Look for leading indications that may result from a number of catalysts in the US markets in the next few weeks which could trigger a change in investor sentiment. These include: Corporate Earnings, the G-20 Meeting, the US Fed FOMC meeting, Quantitative Easing (QE2) and the US Federal mid-term elections.

Stay tuned for further analysis of prospects for the Aussie market. Next time we will examine the Australian market’s performance with relation to the US milestone events and Chinese influence.

By Michael Hevern
Head of Research

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Stock Market Analysis: Weekly Market Wrap

Friday, October 22nd, 2010

Weekly Market Wrap – US Dollar is in Focus

The Aussie market has been treading water this week but we are still constrained within the 4550 – 4700 trading range. The Aussie dollar reached parity but has backed off slightly since and commodities have backed off record levels.

Ahead of the G-20 meeting the US Treasury Secretary, Timothy Geithner, has said that the major currencies are “roughly in alignment now”, suggesting there is no need for further US dollar weakness. This will weigh on commodities prices near term, demonstrated by the pullback in the gold prices this week.

Overseas markets have generally traded higher this week on the back of the US Fed Reserve’s promise of a further round quantitative easing (QE2), better-than-expected corporate earnings, Chinese GDP data that showed that its economic growth remains robust, and the forecast of improving growth in Germany.

US Markets

US markets are trading near 2-year highs as investor sentiment continues to be buoyed by the prospect of a further round quantitative easing (QE2) and better-than-expected corporate earnings. The surprise Chinese rate hike initially triggered a sell-off, but upon reflection was seen as a sign of strength of the global economy from a number of blue chip companies. Financial sectors continue to underperform due to their regulatory issues and tech stocks continue to report well as corporates look to IT for productivity improvements in the jobless recovery.

The US dollar remains in focus this week and may be setting itself up for a turn in fortunes near-term, particularly following the comments from Mr Geithner. Overnight, the sectors supporting the markets included the Industrials (up 0.8%) and Consumer Discretionary (up 0.6%), while the Materials, Energy and Financial sectors ended flat for the session. The Dow closed up 0.4% at 11,147, while in the broader markets the S&P 500 index was up by 0.2% at 1,180 and the tech-heavy Nasdaq ended up 0.1% at 2,460.

European Markets

European stocks are finishing higher this week. Germany has reached fresh 52-week highs as the economy minister forecast that Germany could expect growth of 3.4 percent this year, rather than 1.4 percent as projected in April. The German economy is critical to the performance of the eurozone and has been driving the economic recovery out of the GFC.

In London the minutes of the BoE rate meeting showed that some policy makers saw an increasing likelihood that further monetary easing will be needed. This allowed the market to recover from early losses.

The euro is still hovering around 8-month highs at $US1.40. Overnight in London the FTSE 100 index closed up 0.5% at 5,758, the German DAX was up 1.3% at 6,611, and in France the CAC was up 1.3% at 3,877.

Asian Markets

Asian markets ended the week mixed. The key drivers for Asia came out of China this week as the market reached fresh 6-month highs. The news began with a surprise quarter-point interest rate hike by the Chinese central bank (the first increase since December 2007), which initially triggered a sell-off in equities and weighed on risk assets globally with fears that the world’s fastest growing economy could dampen global growth. Upon reflection investor sentiment turned, suggesting that the rate hike indicated a strong Chinese economy.

Yesterday Chinese stocks declined after data showed the Chinese economic growth slowed moderately in the third quarter as inflation rose, with the 3Q GDP rising 9.6% (but down from 10.3% from the previous quarter) and CPI rising to 3.6% – the highest level in 23 months. The data supported the surprise rate hike by the Chinese government as it continued to withdraw stimulus and took measures to cool sectors such as the property market. Banks and brokerage houses led losses in China as investors took profit.

Tokyo stocks continued to fall, led by exporters and currency-sensitive stocks that are being hurt by the yen being at 15-year highs.

Yesterday in China the SSE Composite closed down -0.7% at 2,984, while in Hong Kong the Hang Seng Index was up 0.4% at 23,649 and in Japan the Nikkei 225 Index was down -0.1% at 9,376.

Commodities

The lower US dollar will drive base metals prices near term. The comments from the US Treasury Secretary suggesting there is no need for further US dollar weakness will no doubt play out next week. Gold has given back 2 weeks of gains as it retraced from the record levels of $US1,384 last week. The Fed’s QE2 is yet to be implemented, the next FOMC meeting is on 3 November.

Overnight, commodities were lower due to the stronger US dollar. Benchmark crude NYMEX for December delivery was down -2.3% to settle at $US80.67. Copper prices fell as Copper for December delivery was down -0.3% at $US3.7755. Gold prices backed-off record highs, with December gold down -1.5% at $US1,323.20.

ASX News

The Aussie market has been trading sideways this week and is still constrained within the trading range between 4550 and 4700. The big story for the week was the Aussie dollar’s parity with the US dollar, closely followed by James Packer’s corporate raid on Ten Network (he now holds an 18 percent stake). The Aussie dollar has backed off its highs and the gold price has been sold off this week. BHP remains committed to its hostile takeover of Canada’s Potash Corp, and investors and banks are watching the RBA for comments relating to interest rates ahead of their November meeting (Melbourne Cup Day).

Our View

Overseas markets continue to perform well with the US nearing 2-year highs, Germany at 52-week highs and China at 6-month highs. Commodities prices have backed off record levels, led by gold. The ASX may suffer if the US Treasury Secretary has his way with stemming the US dollar weakness, which could hurt commodities prices and in turn our mining stocks. Investors should monitor the US dollar’s performance as a leading indicator for a change in sentiment near term.

The S&P ASX200 is currently trading around 4620 and is near the middle of its current trading range. The key levels on the ASX are still around 4720 and 4,550. China, QE2 and the US dollar will be key for next week’s performance.

By Michael Hevern
Head of Research

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Old Dog New Tricks – Market Performance Dashboard For 2010

Wednesday, December 16th, 2009

Investors around the globe are preparing to close out their books for 2009; most will be very happy with their performance, especially those who were lucky enough to see the turnaround in March and had the courage to hold on as the trend unfolded.

Huge sums of money are still sitting on the sidelines waiting for an elusive market pullback. Most markets – having made history in the rate of their recovery from the bloodbath resulting from the Global Financial Crisis (GFC) – are now grinding sideways and are refusing to pullback. 2010 will start out as a battle between bullish and bearish forces in an attempt to resolve these sideways markets.

When developing your investment strategy you need to evaluate how investment markets are performing. To assist you in this evaluation we have developed a Market Performance Dashboard. The Dashboard provides an overall view of the global market environment to help investors assess their investment strategies.

The components of the dashboard are:

1) Asian Economy Market Leader – China (The Shanghai Index)
2) Western Economy Market Leader – S&P 500 Index
3) Investment Funding US Dollar Index

The performance of these components is tabulated below. You can see that China has been the engine behind the market recovery in the aftermath of the Global Financial Crisis (GFC). The US Markets then followed the bullish lead from China. Year-to-date (YTD) China is up 76%, the US S&P 500 index up 36%, while the US dollar has fallen 6%.

Table 1: Performance of Dashboard Components.

China the Engine Room

The Chinese market led global markets out of the GFC, turning around back in October 2008 (refer to the chart below). China has led the performance of all other major market economies. The GDP figures from China have confirmed that their economy is continuing growth, though at a slower rate. The GDP figure in the third quarter was up 8.5%, topping the previous quarter growth rate of 6.1%. The government is targeting an annualised rate of 8% for 2009.

Recent data confirms that the manufacturing sector is expanding. This does raise concerns about overcapacity in the Chinese economy, as this could have a deflationary impact on its trading partners.

Chart 1: China s Shanghai Index

US Market

The US markets have been grinding sideways for the past month. M&A activity is healthy in the US markets and the market did not even blink this week as the US banks said they are preparing to payback US$51 million of their bailout funds through further new share sales, even General Motors is saying they may be paying back their bailout monies sooner rather than later. This all points to a healthy market environment, though there are still issues with asset valuations and the credit markets (refer to the recent situation with Dubai World).

Recent economic reports have supported the view that the US markets continue to recover from the worst market conditions since World War II. Retail Sales Index and the Producer Price Index are improving and recent unemployment figures showed a contraction to 10.2%.

Chart 2: S&P 500 Index

Investment Funding

The dollar index measures the greenback against a basket of seven currency majors, dominated by the Euro (56.7%). The US dollar has been seen as the reserve currency of choice for years; however this view appears to have had a dramatic change this year.

Money to invest in stocks must be funded from somewhere. Until early this year the Japanese Yen has been the funding currency of choice, but as a result of the U.S. Federal Reserve slashing of interest rates for an extended period and the severe devaluation of the US dollar (see the chart below) the tables appear to have turned and the US dollar was starting to be seen as a funding currency. This view held true until last month and appears to be unwinding as the US Dollar Index has surged 4% in the past few of weeks.

Chart 3: U.S. Dollar Index

The Dollar Index and commodity prices have been inversely correlated as a general rule. Thus by knowing what the U.S. Dollar is doing you will have a feel for the performance of the commodities markets.

Conclusion

The S&P 500 and the Dollar Index have been inversely correlated all of this year. If this relationship continues into 2010 it could provide headwinds for the US equities markets, if the US dollar continues its resurgence. The engine room for the global equities markets is China and you should be monitoring it carefully in order to align your investment strategies with the world market conditions.

The Market Performance Dashboard for 2010 outlined here is designed to give you a simple snapshot as an early warning of any change in market direction and/or sentiment, as we embark on a new financial year.

Keep up to date with market developments through our daily revision of the Market Performance Dashboard at the MDS Financial Research Morning Wrap.

Michael Hevern
Head of Research

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ASX Top 20, US Dollar and Index Analysis

Tuesday, October 27th, 2009

Dear Members,

I have updated MDS Radio with a new recording covering the Dow, XJO and the ASX Top 20.

Click here to watch the presentation.

Best Regards,
Leon Hinde.

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Gold – two scenarios for bullion

Tuesday, August 25th, 2009

 

Gold has been quite subdued since June with some conflicting economic pressures containing it to a relatively tight range. The main aspect impacting the price of Gold undoubtedly is the US dollar. Gold and the US dollar have had an inverse relationship for the past six months or so with weakness in the greenback pushing bullion higher and vice versa. Looking at the US dollar Index, which measures the value of the US dollar against a basket of six other major currencies, we see that it’s trading at critical levels. Two broader patters are obvious in the chart below.

 

20090824_dxy1

 

Now looking at the gold chart independently of the Dollar index, we see a wedge formation with a series of higher lows and lower highs constricting the relative price movement in Gold. Although the marginal bias in a pattern like this is to break in the direction of the prevailing trend it’s by no means a forgone conclusion. The only real conclusion that can be made is that Gold is likely to break one way or the other with quite a degree of velocity.    

 

 20090824_ctx1

 Two trains of thought are evident at this juncture;

  1. The rise in equity markets have come too far too soon with underlying earnings unable to support the inflated share prices that we’re currently seeing. Equity markets roll over and the US dollar benefits from a flight to safety. This is a bearish scenario for gold which is likely to break below key support of $930 an ounce with a move to $880 likely.
  2. Equity markets continue to be bullish with the signs of economic recovery filtering through to company earnings supporting higher equity prices. At this stage, traders look towards the fundamentals of the US dollar and view the large quantitative easing strategy (printing money to buy debt) as a negative for the greenback. The US dollar breaks support increasing the appeal of gold as a store of value. Gold is then likely to trade above $1000 an ounce before year end.


Option one is supported by the majority of market commentators – Option two would therefore be going against the crowd – sometimes its better the tread your own path!

 

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Old Dog new tricks – Crude Oil, 2009 Outlook

Wednesday, January 21st, 2009

The interrelationship between the greenback, crude and bullion has historical roots from the original pricing and sale of Crude Oil from the Middle East, which was originally swapped for Gold until OPEC officially agreed to sell exclusively in US dollars.

Since this time Oil and Gold have generally moved the together in terms of price, with a positive price correlation over the last 50 years for more than 80% of the time. The price of oil in terms of gold ounces has averaged about 15 barrels per ounce. At current levels this indication alone would suggest that either Gold is overpriced, or Oil is trading at a discount of around $20 a barrel.

1. Crude Oil


Crude Oil broke out of its long term $10 – $40 trading range in 2004. Within two years the price reached an all time high of $75 before pulling back to $50. Within the next 12 months, the price went from $50 to $150. An exceptional move! At this stage just about every analyst suggested that Crude Oil would exceed $200 a barrel in no time. However between July and December 2008 the market dropped from $150 or so to $46, taking out significant support at the $50 price level. The next big support is the 2004 breakout level at $40 which we are currently testing.

On the ride up the fundamental story was a bit like this: We are at peak oil levels. Most OPEC and many non OPEC producing countries have reached their peak production levels in Crude Oil. The easy oil is gone, production will decrease over time as less and less oil is available. The remaining oil is more difficult and more expensive to extract. The worldwide Crude Oil demand is rising rapidly, as countries like China and India industrialise and need more crude oil for transportation and power generation. Supply is tight, demand is increasing thereby leading to higher and higher prices.

Watching stories today the tune has certainly changed. We have too much Crude Oil around. Due to the financial crisis worldwide, less energy is needed for transportation (less trade, shipping rates are falling like a stone due to decreasing demand). We have more than enough Crude Oil still in the ground. There is no peak oil as yet. We have abundant supplies. The improvements in technology make it economical to extract oil which a few years earlier could not be extracted efficiently. Crude Oil prices will stay low for the foreseeable future.

What the outlook for Crude will finally be I cannot say with any degree of certainty, however I do know that the trend in Crude Oil is down, the momentum is down so we are more likely to make money trading the short side. You may have heard reports recently of positive returns generated from Hedge funds or Commodity Trading Advisors who focus on the global futures markets. These funds predominantly run trend following models which track a defined trend in the market and ride the trend until it fails. At current levels the trend has stalled and we may be seeing a reversal, equally plausible however would be for another leg down in the price of Crude. Time will tell and having the capability of trading the trend when it does eventuate is certainly an opportunity well worth exploring.

2. Gold
Gold has certainly offered a shelter to the financial troubles of recent times, booking gains over the last 8 consecutive years. The fundamentals for the precious metal remain strong and we would expect its appeal to continue given the pressures likely to impact the US dollar in the coming months/years. In times of distress and we are certainly there, it is often a good solution to take a look at the long term picture and as with Oil, trade on the side of the momentum trade with the trend.

3. US Dollar

Looking at the US Dollar Index (which measure the value of the US Dollar against a basket of currencies), it has been in a downtrend since 2001 forming a low midway through 2008 around 72. The US currency then rallied from an August low to the recent highs of around 90 (dollar index) defying fundamental logic. The reason given for the rally was that US fund managers liquidated (mostly overseas positions) to meet investor redemptions and repatriated the funds. They sold the foreign currency and bought US Dollars. This increased the demand for US Dollars on a short term basis and the price went up, quite dramatically.

In a desperate attempt to avoid disaster the Federal Reserve has lowered interest rates to virtually 0. Although overseas interest rates are also falling they are falling at a lesser rate than in the US. With interest rates close to 0, investors are now less inclined to hold US Dollars and will convert them back into overseas currencies thus contributing to the fall in the Dollar Index. The negative fundamentals of the US economy and the huge problems facing the country will prevail and I believe we will continue to see further price retracements and this is not taking into consideration if the Oil was changed to be priced in the Euro s.

Conclusion

Gold, Oil and the US dollar will remain volatile in the near term. There is a good chance the greenback will rise in the short term, before fundamentals will take over, while Crude looks set to continue to slide or remain flat at least. Gold looks set for a pull back, however its outlook will be closely linked with the move in the US dollar. As the Greenback pulls back we would expect this to benefit the price of Gold. To take advantage of the trading opportunities these markets create call our trading desk on 1300 65 90 90.

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