https://www.cnbc.com/2018/05/15/aud-australian-dollar-and-market-movements.html
Market contradictions can be
interesting, but irrelevant, or interesting and significant. The behavior of
the Australian dollar is one of those contradictions.
On the one hand the Australian
market is making new 10 year highs. This is generally taken as a sign of
economic strength. Its particularly important for Australia where the market
has been trapped in a prolonged sideways movement for more than a year while
the rest of the world in the US and Asia have been streaking ahead.
On the other hand, the Australian
dollar has broken a long term uptrend and is rapidly moving towards 12-month,
and potentially, two-year lows. The Australian Reserve bank is celebrating
because they have been aiming for a lower dollar as a matter of principle.
The last time the Australian
market was trading near the current highs, the Aussie was trading at $0.81
rather than heading for a low of $0.715. The last time the AUD traded around
$0.715 the Australian index was at a low near 4750.
This is the contradiction — the
falling Australian dollar and the Australian market making new 10-year highs.
Interesting, but irrelevant, or significant?
The answer lies in the speed of
both moves. Once the AUD uptrend line was broken near $0.765 it has taken less
than 3 weeks to touch $0.74. The AUD chart is defined by trading bands. The
lower edge of the trading band is near $0.74. The upper edge near $0.775. The
breakout above $0.775 had a target near $0.81. This was achieved.
A fall below $0.74 has a downside
target near $0.715. This is calculated by taking the width of the trading band
and projecting it downwards.
The speed of the rally in the
Australian Index is equally astounding. In six weeks it has rallied from near
5750 to 6150. This is a very fast market rally and rallies of this nature are
unsustainable. This is an exceptionally fast flow of money into the market and
a good example of irrational exuberance as there are limited sound fundamentals
to support this confidence.
The trajectory of the Aussie
dollar suggests the way this contradiction may be resolved with the Aussie
market moving back into sync with the Aussie dollar.
That's not to say we are looking
at a trend change, but traders are alert for evidence of consolidation and a
pullback in the Australian market particularly if the Aussie dollar fails to
hold support near $0.74.
Daryl Guppy is a trader and
author of Trend Trading, The 36 Strategies of the Chinese for Financial
Traders, which can be found at www.guppytraders.com. He is a regular guest on
CNBC Asia Squawk Box. He is a speaker at trading conferences in China, Asia,
Australia and Europe. He is a special consultant to AxiCorp.