Gold and AUD bounce highlighting underlying demand

This morning looking at market reports you would be forgiven for thinking that the sky had fallen in. Even scratching the surface shows that all of the negativity is founded on exactly the same negatives that were around last week. Will Spain go to the ECB for a bail-out and will US earnings season be a disaster. On the Spanish item the best assessment comes from my colleague Ric Spooner who looks at the way in which the markets have responded recently (you can see his post here). I don’t want to be simplistic but following the money is one of the best indicators as to what the real sentiment of the market looks like.

Looking at how the USD has been performing the gold price is quite telling as you can see on the chart below:

As you can see the metal is trading right at the high-end of its mid-term trend channel which on the face of it would suggest that we are in for some price resistance.

As you can see, in the last day (which isn’t quite over as I am writing) the price has bounce significantly off the lows. Although this is only a single candle it goes to show that there is a lot of underlying interest in gold. With this bounce the price is also remaining on the trajectory of the +1.25 SD band of the 50 day moving average which still points towards good price momentum. If we do enter a significant ‘risk-off’ phase due to European or US developments there will likely be some price retreat here but short-term signals would suggest there would be a rapid accumulation once price levels steady.

The real standout yesterday was the AUD/USD pair which saw a significant accumulation in an environment where may other currencies were unable to make inroads.

It seems that the AUDUSD is finding very solid support around the previous lows and is now entering into a ranging channel. This has come at a time where the 200 day moving average is essentially flatlining so I think a mean reversion move seems likely. Whilst not the most amazing risk/reward trade – for those looking to be long AUDUSD a stop below the low of today’s candle with an initial target of the 200 day moving average seems like a good start.

Fundamentally there are significant arguments being made in favour of the AUDUSD. These note our sovereign debt rating and our (still) decent interest rate differential as a rationale for why the interest rate cut (potentially cuts) doesn’t matter for the underlying support of the currency. Not that I believe it makes a huge impact on what is happening in the currency market but you have to be mindful with this pair that to take a long position requires looking through a lot of the negativity surrounding the outlook for demand for commodities from China. This is a big ‘bee in the bonnet’ issue so I would suggest is the item to have a very clear picture on before making mid-term trades in this currency.

I would take care with a long entry into the AUDUSD. As you can see on the chart above the moving averages are all pointing lower so the short-term momentum is still negative. I think waiting for the 50 period moving average to point higher would be a good start to confirm the shift in direction. As you can see it’s already flattening out so a reasonable bump higher should see it start to move higher.

For the session ahead in Australia we have been left with quite a benign lead from the US. Apple shares again were under pressure which certainly pushed the NASDAQ into a more aggressively negative position overnight. As I mentioned there was decent support in the US off the lows but nothing to shoot the lights out. The Alcoa result will be telling. This is seen as the bellwether for the market so you can expect it to get some significant attention when the Q3 numbers are released. Also there are a number of the US banks out this week so these numbers are also going to be well worth a look.

The commodity markets at large were flat to negative with copper one of the more notable decliners falling around 1.25%. Interestingly though there was an increase in the spread between Brent and WTI oil which shows that relationship still isn’t ready to normalise. It certainly has been one of the more perilous pairs trades available.

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