HedgeFundLIVE.com — It has become obvious that equity markets are being driven by the commodity and currency markets. We have watched breaks in Silver, Gold, Oil, the EUR/USD and the AUD/USD create strong enough effects to whip around strong/weak stocks. Gold which has shown more resilience than Silver lately, should no longer be thought of as the force driving taking the market higher. The divergence in the price action of Gold against Silver, Oil, and equities should be noted. It is now a separate asset class being used to hedge against inflation, for personal savings, and by countries as a stable store of value and wealth (reserve currency). Markets can no longer be exclusively traded based on specific asset analysis, particularly in the long-term.
Some basics on the following: Oil/commodity prices are crucial in consumer/business spending; consumer spending effects businesses; businesses make up economies; economies are traded through currencies; currencies are susceptible to all global effects (economic, political, natural disasters, etc.). However, there is no ONE top market that dictates to the rest, they are an interconnected web. When one strand is disturbed, the entire web will shake. Obviously the list of relationships above is incomplete and meant to be so for the sake of this article.
In the graphs below, please notice the same broken trend line throughout the different markets which lasted from mid March to the beginning of April. Very simple technical analysis, but it shows systemic weakness.
Oil recently pulled back, falling from highs near $112 per barrel. At the same time, the AUD/USD fell. The AUD/USD is a commodity currency, with a lot of value based on Australia’s coal, oil, and mining exports. The AUD/USD also took a hit from the decline in Gold, Silver, and other mined commodities. The currency fell from 1.10 and the next major support will be at 1.02. If the AUD continues to 1.02, it will decline roughly another 6%, the decline in Oil will correlate to this area with a 7.3% decline.
AUD/USD daily chart 5-11-11
The red line on the AUD chart and the Oil chart marks this support area. The red line on Oil is at $91.50, but it may get sucked below to $90 as markets tend to favour round numbers. These two are highly correlated, but it should also be noted that the FXA (AUD/USD ETF) correlates with the SPY 75.76% of the time (remember the web). The green horizontal lines indicate key levels: AUD/USD at parity and Oil at $100 per barrel. On a fundamental note, Australia released trade deficit data earlier this week and beat estimates by over 300% (1.74 billion vs. 0.49 billion). The AUD/USD barely moved higher after the data, which shows weakness.
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