A look at asset performance since May 1 shows AUD on its own path

Using May 1 is a great way to compare assets. Not only does it represent the start of a new month, it marked a turning point in markets as worries mounted about the global economy as US and Chinese growth slowed and it became clear that Europe’s LTRO was not going to solve the crisis.

Not surprisingly, JPY is the best performer but AUD is neck-and-neck with USD for second. Predictably, the euro is lagging.

A look at commodities shows near-universal declines, save for food which is benefiting from the near-drought in the US and natural gas which has rebounded from long-term lows.

Singling out industrial metals, which are the best gauges of global growth, we see 7-17% declines since May 1. Crude is down 12%.

Major stock markets in the US, Japan and Europe are virtually flat over that period.

Given the nature of the period, the divergence between commodities, stocks and AUD is difficult to explain. Either stocks and AUD (not to mention bonds) are significantly overvalued or commodities are undervalued.

I tend to lean toward option 1. AUD has probably benefited from flows out of Europe and its new safe-haven status. Chinese rate cuts are emboldening longs but until commodities turn, there is no sign that they’re working.

Overall, AUD can continue to rally but from 1.0500-1.0850, the chance of a swift sell off makes it a dangerous trade. In the meantime, keep an eye on industrial metals prices.

Author: Adam Button

Adam Button is the managing editor of ForexLive™. He was previously the chief currency strategist at XForex and has also worked with Intermarket Strategy. Adam believes there's an edge in knowing every tidbit of news. He was formerly the head of the markets team at the Canadian Economic Press and is a graduate of Ryerson University. Adam lives in Montreal, follow him on Twitter: @FX_Button.

3 Comments

  1. Hi Adam, Thanks for the well written piece. The a/u looks pretty toppy on the h-4 sar line. The weighted m/a,s in short term charts are starting to compress also. I wouldn’t be surprised to see some selling/ covering going into the weekend.
    If Bundsbank does want to diversify into aud I doubt they want to catch a falling knife, and probably are looking for more attractive levels to get in. I switched over to gbp/usd last night, and that pair has only moved 5+ pips to aud/usd 800+ pips in the same time frame. It is just below the 200day ma so if it breaks up over that area it could be a good long play. If not I like the short side of it.

  2. hello,
    very interesting point!
    thank you!

    i was one of those talking about aud when price was stable around parity and all other majors where still going down or not showing good things. was a strong sign of streght….

    i think AU will be now stable around these levels and find a kind of supply/demand balance between 05 and 03, until things will be more clear around markets.
    there is gold in a closing triangle seen in hourly charts.
    soon we’ll have a lot of answers :)

  3. prediction by 2115 : AUD/USD 1.5, EUR/AUD 0.7, AUD/JPY 1.2

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