Analysis | May 14, 2021

Outlook and forecast: AUD/USD

We looked at AUD/USD last week and after moving higher we have seen the AUD fall back. We have very choppy trading in this pair. We are not seeing any big upside in the Aussie Dollar even as commodity prices surge higher …

We think AUD is s sell on rallies or breaks lower and for clues to weakness in AUD/USD we need to look at the price of commodities and in particular the price of Iron Ore…

The Boom In Commodities and Iron Ore’s Surge

The commodity complex has had its best year in terms of price strength in over 40 years and we have seen commodities that Australia exports surge in value. The commodity to focus on in our view is iron ore which accounted for 45% + of all exports last month. In fact, if we look at export data during the pandemic we can see Iron ore exports are up while all other exports are down making the Aussie economy heavily reliant on Iron Ore. Prices have surged as we can see on the chart below but can they go even higher?

 

They could go higher short term but we have a parabolic move now and it’s driven by emotion – in fact, iron ore and many other commodities such as Lumber are behaving like Cryptocurrencies! If you read the news the surge in Iron Ore is all too to do with tight supply and robust demand but speculation is heavy in Iron Ore and related commodities.

This week China’s commodity exchanges have recently moved to raise trading limits and margin requirements in a variety of commodity contracts. The Dalian Commodity Exchange vowed to “severely punish” violations in terms of iron ore trading. The Shanghai Futures Exchange also moved to tighten trading on steel, while the Zhengzhou exchange made a similar move in relation to thermal coal.

We view the AUD as vulnerable to a big correction to the downside – despite the bull run in commodities in the last 2 months we are not getting close to March highs in AUD/USD – with Iron Ore vulnerable to a major correction we now see the AUD as a sell on rallies or breaks lower – our view of the technical levels of support and resistance below:

Technical Analysis

The move above the 0.7800 level has failed with this weeks big red candle being heavily bearish in our view – we view any rallies now as likely to fail back to double trend line resistance indicated. If we break below 0.7700 and close below the level we would expect a big decline down to major support levels indicated

 

 

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