Market Bounce Boosts Aussie
Fundamentals
The bounce that equity prices have seen recently has been a key driving force behind the resurgence in the Australian Dollar. The Dollar Index has moved inversely to equity prices - falling with every rally, as investors renew their appetite for risk, and rising when investor confidence is shaken. It is too early to tell if the rally that began in the first half of March will be able to sustain itself, but economic data has shown improvements in construction, residential real estate and industrials. Commodity prices have also seen stabilization over the same timeframe, especially base metals, a key Australian export. Even if equity prices fall back, commodity prices may remain firm, possibly paving the way for further gains in the Aussie. Central banks have thrown astronomical amounts of money at the financial and economic mess, which could cause inflation to really begin to pick-up steam again. A high inflation scenario would benefit currencies from commodity exporting nations such as Australia, New Zealand, Canada and Brazil. If China is able to right the ship, it would give the Australian economy a huge boost, as the two nations are important trade partners. China has been busy lately trying to secure their supplies of raw materials, which includes trying to buy mines and acquire mining companies. Australian legislators are more than happy to listen to proposals, as domestic mining activity has dropped and new Chinese mines could fill the employment vacuum created by the slowdown. Traders were thrown a curveball when the Australian unemployment rate jumped to 5.7 percent, exceeding the consensus estimate of 5.4 percent. Much like the US, Australia is mired in a housing slowdown and unemployment may continue to climb if raw material demand remains lackluster.
Given the volatile nature of the financial markets, traders may be reluctant to take on unprotected futures positions. Traders that are bullish on the Australian Dollar might give some thought to putting on a long future with a collar, by potentially buying the June future at 0.7100, and then possibly selling a May 0.725 call and buying a May 0.695 put at even money. This would potentially provide the trader a 1:1 risk reward ratio, as profit and loss are both capped out at 150 points, or $1,500. Maximum profit would be reached if the June contract closes above 0.725 at expiration, while maximum loss would be reached if the June contract closes below 0.695 on the May 8th expiration date.
Technicals
The June Australian Dollar chart shows prices consolidating after taking out resistance at 0.7000. Prices have come down to test the 0.7000 level and have bounced back, indicating that this level could now be considered near-term support. For the market to gain further upside momentum, prices would have to cross through resistance at 0.7174. The 50-day moving average is very close to crossing through the 100-day, which can be seen as bullish longer term. The strength of this signal may be questioned by traders, as there is not the wide divergence that traders like to see prior to a crossover. The RSI remains just below overbought levels, suggesting rallies may be limited by selling pressure.
Rob Kurzatkowski, Senior Commodity Analyst
