Originally published by AxiTrader
79 cents seemed so far away when the Aussie fell to 75 cents just a little over a month ago.
But here we are this morning with the Aussie trading back up at 0.7905. And having taken out the last line of major Fibonacci resistance at 0.7886 (61.8% of the 81-75 fall) there is a growing chance the Aussie trade back up above the 81.24 cent level which marks the 2017 high.
In no small part the Aussie's rally is attributable to the weakness in the US dollar as the AUD:DXY 35 day correlation (price) of -0.8884 suggests.
But there is more to it than that as I've been highlighting the past couple of weeks.
So today, before I talk about the week ahead, I want to highlight two charts that show graphically the two key non-US dollar drivers of Aussie dollar strength since the AUD/USD low in early December around 75 cents.
The first of those drivers is the flow of Australian data and the improvement of same. The second related to the outlook for global growth and the rising recognition that perhaps commodities and the companies in the mining and metals sector which are leverage to this synchronised global growth cycle were relatively undervalued.
I offer the following charts in evidence - both clearly show their own synchronisation with the recovery in the Aussie dollar. That in turn suggests there is a real belief in and clamouring for assets which benefit from this upswing in global growth.
Chart 1 - The AUD/USD against the Citibank Economic Surprise index
As I highlighted earlier in Market's Morning, what's important about this relationship is that Australian – and Chinese – data has improved sharply recently as measured by the Citibank economic surprise index. From a low around -47.4 in December the Aussie CESI is at +24.8. That turn in the data, unsurprisingly coincided with the turn in the Aussie dollar.
Chart 2 - The AUD/USD against the ratio of mining and metals shares to the overall MSCI world share index.
This index is at the highest level it has been since 2015. The turn in it too coincided with the turn in the Aussie dollar last month. It also coincided with the overall improvement we've seen in commodity markets. And the reason I use this index as an indicator for the Aussie dollar is that it essentially tracks relative money flows.
It the ratio stays the same then its clear new money is neither being added or subtracted from a sector which is a good indicator - like the AUD/USD - for global growth. But the recent appreciation, from very low levels, of this ratio suggests real money is getting behind the reflation trade.
That's something bond traders might want to think about.
Anyway, I'll continue to monitor these indicators for indications of whether the Aussie performance is getting out of alignment with these key drivers.
But the above recognition of drivers also highlights the importance of this week's dataflow here in Australia.
Today we get the release of the monthly inflation guage. Motor vehicles tomorrow, home loans Wednesday and then Westpac Consumer sentiment and unemployment on Thursday. All of these data releases are germane to the discussion about where the economy is, where households are, and what the prospects are for domestic spending and consumption. They could all help give a guide to a growing chorus which suggests that the RBA will be moving rate higher in 2018.
All are important for the Aussie dollar.
In the meantime here's the daily chart showing the clear break of resistance. That opens up a run to 0.8020 with support in the 0.7874/86 region.
Have a great day's trading.