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 Markets and Money

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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

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