What Is the Weak Aussie Dollar Telling You?

I’ve just had a week off with the family on the Gold Coast. The weather was superb. A consistent 28 degrees and clear skies…warm mornings and cool evenings. Pool and beach swims daily.

What am I doing in Melbourne?

Summer is still elusive down here. At midday yesterday in St Kilda it was just 15 degrees. The English tourists living here must be a little peeved…

While Melbourne can’t find consistent heat, the market continues to warm as we head into summer. While I was away, the ASX 200 jumped 150 points, extending its Trump-inspired rally, which started with his election victory a few weeks earlier.

Most of the strength came from the commodity sector. But the commodity rally isn’t just about Trump and his supposed spending plans. It’s been underway since the start of the year.

You can see this in the share price of BHP Billiton [ASX:BHP]. It’s predominantly exposed to iron ore, oil and gas, and copper. After bottoming in January at $14, it closed on Friday at $26.50.

That’s an 89% gain in less than a year.


Source: Optuma
[Click to enlarge]

The rise is largely thanks to the extraordinary uptick in the iron ore price, which has defied all predictions this year to soar an incredible 100%-plus from its lows in December 2015.

At the end of last week, Australia’s most important commodity traded near US$80/tonne!

What I find a little strange, though, is that the recent surge in commodity prices wasn’t accompanied by ongoing strength in the Aussie dollar.

The next chart shows the Aussie/US dollar exchange rate. As you can see, the Aussie dollar broke sharply lower following Trump’s election victory. This throws up a few questions…


Source: Optuma
[Click to enlarge]

If you compare the two charts above, you can see that the Aussie dollar bottomed at the same time as BHP (the commodity proxy stock).

The Aussie and BHP have more or less been in sync all year, up until the last few months. More recently, though, as BHP broke out to new highs, the Aussie dollar fell to new lows. This is quite a divergence.

I’m not sure what it means. But don’t let that concern you. I’m not sure what anything means when it comes to the market. Keep in mind that the main aim of the market is to drive you slowly insane. So don’t try and work it out or rationalise what’s going on.

Just go with the flow.

Having said that, it is unusual for the dollar to head south while commodities head north. It may suggest that the commodity rally (or the iron ore rally in particular) is overdone.

Or it may be just a kneejerk response to Trump’s victory and an optimistic surge into US assets and dollars in the expectation of strong future economic growth.

It may just hint at the fact that, apart from the current commodity price resurgence, Australia doesn’t have a lot of sustainable growth options.

The housing and apartment construction boom sustained our economy through the long commodity investment downturn. The RBA made this possible by lowering interest rates to record lows. This had the added effect of causing a house price boom, which in turn boosted consumption and buoyed the economy even further.

But with the interest rate easing cycle coming to an end, you have to wonder where the next leg of growth will come from. This is what the weakness in the Aussie dollar might be pointing to.

As I said, I don’t really know what’s behind the commodity price/Aussie dollar divergence, but it’s worth keeping an eye on.

One undeniable casualty of Trump’s election victory is gold. This is another one of those confounding events. Wasn’t a Trump victory meant to be bullish for gold?

It was…for a few hours. But it all came apart as the narrative over Trump’s victory — and what it might mean — changed abruptly. The gold price has been under pressure ever since.

Take a look at the chart below. As you can see, gold spiked higher as it became apparent Trump would win. It then reversed sharply. It’s been downhill ever since.

Crucially, late last week, gold broke through support at US$1,200 an ounce, marked by the green line on the chart. That it couldn’t find support here after such a sharp fall is a concern.

The bulls, like me, have been proved wrong. The emerging gold bull market that looked so promising just a few months ago is dead for the time being.

You can talk all you want about the long-term drivers for gold. But, for now, the market is saying they don’t matter.


Source: Optuma
[Click to enlarge]

Which brings me to a final thought for today…

Is gold a leading indicator for commodity prices, or is it irrelevant?

For example, gold bottomed in late 2015, while commodity prices in general bottomed just a few months later. Does that mean gold’s ‘Trump reversal’ will soon be followed by a reversal in commodity prices? Is that what the Aussie dollar is saying?

It looks like a long shot to think this. But remember, the market never does what you expect, when you expect.

Regards,

Greg Canavan,
For Markets and Money

Editor’s Note: Newman Show Hijacked! James Woodburn and Kris Sayce hijack The Newman Show (again) to discuss recent market news across Money Morning and Markets and Money.

Join Woody and Sayce for an informal shouting match with Jason Stevenson on…Jason’s controversial presentation at The Great Repression conference…the war on cash in India…why you should buy a goat (and raise a herd)…why the government is using climate science to tax you…the real science behind the coming Ice Age…and the commodity that could beat our iron ore as Australia’s top export.

You can watch all that, and more, right here.

 


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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