The Trend Behind the Australian Dollar


The Aussie market is off to a strong start to the week on the back of a lift in commodity prices in US trade on Friday. Iron ore continued its spectacular bear market rally at the end of last week, up another 5.5%.

It’s now rallied more than 20% in the past few weeks, leading some to call this a new bull market. Maybe it is, but I doubt it. The iron ore oversupply story still has years to play out. That means pressure on prices will persist.

Meanwhile, gold took it on the chin, falling about US$15 an ounce before finishing the session around US$1,178. The price action was strange because the US dollar was weak on Friday, and gold usually trades opposite to moves in the US dollar.

The only thing that may have pushed gold lower was a decent headline number on the durable goods report for March. But it didn’t have an effect on expectations for higher interest rates from the Fed. In addition, the situation in Europe remains tense with Greece and its creditors failing to reach an agreement…again…on the terms of the bailout package.

So nothing really bearish happening for gold. I’d put it down to ‘technical’ selling, which means short term traders sell when prices fall below a certain level.

The fall in the US dollar gold price, along with strength in the Australian dollar, made it an especially bad session for Aussie dollar gold. It lost more than $30 an ounce and now trades around $1,505.

It’s largely Aussie dollar strength behind the weakness in the Aussie gold price. Versus the greenback, it’s rallied from below 76 US cents to 78.22 over the past few weeks, which is a decent move in foreign exchange land.

But if you look at the chart below, you can see the Aussie is still in a clear downtrend against the US dollar. It’s a small positive that it’s breached the 50-day moving average but to me this just looks like a pause in the downtrend.

I’m sure the RBA is hoping that’s the case. It would be their worst nightmare to see the dollar continue to rally while they’re feeling hamstrung on interest rates due to the Sydney/Melbourne housing bubble.


Greg Canavan+,
for The Daily Reckoning Australia

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Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.

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