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Andreas Zanin
Analysis | May 7, 2021

Commodity Prices Soar Will the Aussie Follow?

AUD/USD is often seen as a proxy risk on risk-off pair and we have risk on at present with stocks near multi-year highs and the commodity complex has registered its best year in over 40 years. If we look at AUD/USD it’s trading sideways in low volatility but we expect this to change…

Commodity Prices A Big Bull Market

In terms of commodity prices, we have seen them soar in the last few months and its the biggest rise since the 1970s as we can see on the chart below. The second chart shows the Baltic Dry Freight Index which is seen as a proxy for global growth and commodity demand the index has moved up 650% from its Covid low to its highest level in well over 10 years.

 If we look at Iron Ore which is Australia’s biggest export on the chart below its leading the Bloomberg commodity index higher

 Commodities are a Bubble

Latest BofA FMS shows investors are holding their highest allocations ever in the commodity sector. The parabolic moves in many commodities are seeing speculators push prices too far away from the fundamentals. A good example is on the chart below which shows copper against China PMI’s where copper has soared higher despite the PMI’s weakening.

 

Good News But No Big Bullish Price Reaction

In terms of commodity prices they extended on the upside and we would expect a breakdown which would pressure the Aussie lower but what is interesting when we look at the AUD/USD chart below is DESPITE parabolic moves in commodities in the last 2 months + the AUD has been unable to breakout above the 0.7800 level. The majority of traders see no big downside in the AUD but that’s very often when trend reversals occur – our view of the key technical levels of support and resistance on the chart below.

AUD/USD Technical Analysis

We are trapped in a range between 0.7800 and 0.7700 on the chart below. In terms of a breakout lower, we would look to go short below the bottom of the range through 0.7670 with a stop well back from 0.7800 for a move down to the 0.7200 level. If looking to buy it’s through the top of the range 0.7830, stop below the bottom target chart highs. We favour the bearish trade and see it as a good risk to reward selling opportunity.

 

 

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