Forex Focus
Access to foreign exchange trading has opened up exciting trading options for the retail trader. You can now trade alongside corporations and institutions in a highly liquid market that is global, traded around the clock, and highly leveraged. Before jumping into this market,
however, we must understand the factors that affect the forex market. With that in mind, STOCKS& COMMODITIES has introduced Forex Focus to better prepare the retail trader to participate in the currency market.
Is The Aussie A Leading Indicator?
by Darrell Jobman
Down under may be over the top. If you doubt it, then what's it mean
when commodities trend down when the Australian dollar weakens against
the US dollar?
To a large extent, fundamental analysis involves extrapolating the future
from the events of the past as analysts review historical numbers in search
of identifiable trends. Traditional technical analysis suffers from the
same backward-looking drawback when it relies on traditional moving averages,
arcane chart patterns, and a variety of measurements to indicate when or
if a market or security has become overbought or oversold.
The purpose of investing, however, is not to identify what has happened
but rather to anticipate what is likely to happen. One of the best ways
to look and think forward comes from studying how the trend of one market
affects another. Most often, this is called intermarket analysis.
As capital flows from one long-term theme to the next, it typically
shifts its geographical emphasis. In recent years, money has poured into
Asia in search of superior investment returns and out again with almost
single-minded ferocity. In 1998, capital outflows from countries such as
Singapore, Thailand, Indonesia, the Philippines, and Malaysia helped create
a financial markets crisis that spilled over to Russia and then Brazil.
Capital continued to flow into the US dollar to help finance the tech bubble
that eventually began to collapse in 2000 before turning toward Europe
to take advantage of higher real interest rates.
CURRENCIES ARE KEY
In many respects, currencies act as both gateways and signposts for
ongoing macro trends. When a currency is appreciating relative to other
major currencies, it shows which direction capital is moving toward and,
perhaps just as important, which direction it is moving away from.
From an intermarket perspective, the trend of the Australian dollar
against a host of other currencies is often quite instructive. The Australian
dollar is one of the "commodity currencies" (along with the Canadian dollar,
New Zealand dollar, and often the South African rand) because it tends
to move higher or lower in tandem with or ahead of commodity prices.
The key is that a long-term rising trend for commodity prices will typically
coincide with, or even be led by, appreciation in the Australian dollar
relative to the US greenback. A reversal lower and subsequent weakness
in this currency will serve as an early indication that the bull market
for commodity prices may be coming to an end.
FIGURE 1: THE LEADING AUSSIE. From 2002 to 2005 the Australian
dollar relative to the US dollar trended higher. Note that crude oil prices
followed that trend.
Long before fundamental analysts begin factoring in the impact of lower
raw materials costs (to the detriment of producers and benefit of consumers)
and technical analysts begin to notice that sectors previously under pressure
are beginning to rise while those that were recently strong are now breaking
lower, intermarket analysis will have indicated that a trend change is
on the horizon.
Originally published in the January 2006 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2005, Technical Analysis, Inc.
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