Thursday, August 27, 2009

A Look at the Aussie Dollar and What It Might Tell Us About Stocks

Another nice graphic from FinViz: Note how, among the actively traded currencies, the market recovery has been led by New Zealand and Australia vs. the U.S. dollar (top chart). The currencies of the resource producing countries, as a whole, have fared better than those of the resource consumers; countries most affected by economic crisis and rising debt levels have also seen their currencies lag.

But it turns out that AUD/USD is not a bad proxy for risk appetite in the recent market. If you note the second chart from the bottom, you'll see that AUD dropped precipitously during the market crisis, as investors sought the safe haven of USD. While stocks made their bottom in March, AUD held its late 2008 lows and proceeded higher, with peaks roughly corresponding to those in stocks: a relatively flat corrective period into early July, a push to new highs, and most recently rangebound trade.

Which is why, when I saw stocks (ES futures; second chart from top) break below their multiday range this morning, I was particularly interested to see a smart snapback rally in AUD/USD (third chart from top). A five-minute chart that's a little broader (bottom chart) shows that AUD/USD actually moved nicely above yesterday's highs.

These are the kinds of little tells I look for in handicapping whether risk assets will be coming back into favor vs. rolling over. I thought the snapback in stocks, led by currency snapbacks vs. USD, was a point in favor of the equity bulls.