Light gains in the US Friday night, Aussie dollar powering ahead, ASX futures down 18 points

It is probably too early to tell, but we may be on the cusp of a new theme that could help many asset classes achieve better prices. I'm referring to the US dollar index falling about 2% in the last two weeks and--more significantly--approaching a key level that, if it breaks below, could retest the late August lows. This is best explained visually so please see today's first chart  to get a sense of the trend. You may be asking why this is such a good thing, so here are some points:

  • The Chinese move to devalue its currency on 11 August precipitated the big falls in equity markets, as it helped signal that many emerging economies were reaching a pain threshold due to the rise of the US dollar and their US dollar pegs subsequently making them less competitive
  • Because emerging markets experience growth that generally exceeds that of more developed economies, they help support aggregate global GDP growth numbers and assist the feel-good factor whenever institutions like the IMF or World Bank offer pleasing global growth forecasts
  • Commodities are priced in US dollars and, therefore, when the US dollar falls in value, the prices of commodities rise - this relationship is most evident in 'spot metals' like gold (XAUUSD), silver (XAGUSD), platinum (XPTUSD) and palladium (XPDUSD) given their part-time roles as currencies. Firmer commodity prices and a growing market sense that resource stocks have been oversold is fuelling a recovery in that sector.
  • The AUDUSD benefits from a weaker US dollar and--given our weak terms of trade are prohibiting us from benefiting greatly from a weaker currency (global commodity demand and the value of our net exports isn't strong enough to get excited about a weaker Australian dollar attracting more buyers)--equity markets here are probably better off with a steady or strengthening currency theme to attract foreign traders keen to get positive returns from unhedged investments.

On today's second chart I've plotted a bunch of currencies (Aussie, Kiwi, Canadian dollars as well as gold and silver) that have disproportionately benefited since the US dollar began selling off at the beginning of October. The US dollar index is only down about 1.5% since 1 October, while you can see here that currencies that oppose it have rallied to a far greater extent - the Canadian dollar has had the mildest rally of 2.5%, while the Kiwi, Aussie and gold are up around 4% and silver has popped 8.5% higher.

Finally, the last chart shows the ASX 200 cash index CFD, which settled around the 5,250 mark on Saturday morning. This is a healthy level and is probably still low enough to attract bargain-buyers looking to get in before a greater rally plays out, while high enough to keep the threat of sub-5,000 levels out of investors' heads this week.


Source: Rivkin, Saxo Bank

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This article was written by Scott Schuberg, CEO of Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3600.

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