AUD/USD and the Materials Sector

Thursday, May 17, 2012

Good Morning,

Finally, we have a bit of a bid to pairs crossed with the USD. But first, as always, fundamentals. June 16th is the "next day" we hear news out of Greece, but obviously things are tenuous in Europe and you must stay vigilant and trade appropriately given surprise announcements can happen at any time.

In the US, weekly initial claims came out and an analyst on NPR mentioned it was "not a great number, but a good number". I disagree. Until we see the number declining instead of staying flat/rising, these are not good numbers. Equity markets overall are still elevated where poor employment data could bring us down further (barring Central Bank intervention).
Moving into technicals, a few fun charts to review that I discussed in last night's webinar. The webinar should be posted here in a few days and the link contains all previous IBFX webinars.

First up, the AUD/USD. Look at the decline we have had over the past few months:

Past performance is not indicative of future results

Next up, the materials sector ETF, XLB:

Past performance is not indicative of future results

Notice how XLB gave back all of its 2012 gains and is now flat for the year. The AUD/USD chart, where the AUD economy is tied to its biggest export Gold (a material), looks a lot like the XLB chart. These are the inter-market relationships that are so important if you are holding gold, commodity and material stocks, etc...

The forex markets can provide a hedge to your portfolio holdings and the downside risk of those holdings. There are of course, no free lunches and there is nothing stopping Gold and commodity prices from dropping and the AUD getting stronger. As I mentioned last night, what if the AUD central bank said: "we are raising rates". That is bullish for the AUD dollar but most likely bearish for their economy/stock market as raising rates puts the "brakes" on the economy.

So the point is, there aren't any guarantees and you have to trade your plan with pre-determined account and trade risk variables and most of all, realistic targets.
You know that I go on tangents on the trading psycyhology tidbits, but that serves two purposes:
1. make sure you are trading these markets with the correct mindset
2. providing a dislcaimer that this is for educational purposes only and there are no buy, hold or sell recommendations.

Back to the charts. Intraday, the dollar was strong early, but it looks like there is now a bid in the GBP/USD as we had a double bottom formation:

Past performance is not indicative of future results

It seems that there is an underlying bid in both the GBP and the EUR against the USD as the European equity markets get ready to close and the US markets open. Can you be a seller of the USD today?

Happy Trading and Be Environmentally Cool
Coach Brian

Forex trading is one of the riskiest forms of investment available in the financial markets and suitable for sophisticated individuals and institutions. The possibility exists that you could sustain a substantial loss of funds and therefore you should not invest money that you cannot afford to lose.

Posted By: 

Brian Kahn

Brian provides regular commentary focusing on the relationships between various financial markets. An experienced trader and portfolio manager with over 15 years in the markets, Brian relies on fundamental and technical analysis to create trading plans for each and every market entry.