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The behavior of the Australian dollar is a contradiction

  • The last time the Australian market was trading near the current highs, the Aussie was trading at $0.81 rather than heading for a low of $0.715.
  • This is the contradiction — the falling Australian dollar and the Australian market making new 10-year highs.
  • The answer lies in the speed of both moves.
John Phillips | Digital Editor | CNBC

Market contradictions can be interesting, but irrelevant, or interesting and significant. The behavior of the Australian dollar is one of those contradictions.

On the one hand the Australian market is making new 10 year highs. This is generally taken as a sign of economic strength. Its particularly important for Australia where the market has been trapped in a prolonged sideways movement for more than a year while the rest of the world in the US and Asia have been streaking ahead.

On the other hand, the Australian dollar has broken a long term uptrend and is rapidly moving towards 12-month, and potentially, two-year lows. The Australian Reserve bank is celebrating because they have been aiming for a lower dollar as a matter of principle.

The last time the Australian market was trading near the current highs, the Aussie was trading at $0.81 rather than heading for a low of $0.715. The last time the AUD traded around $0.715 the Australian index was at a low near 4750.

This is the contradiction — the falling Australian dollar and the Australian market making new 10-year highs. Interesting, but irrelevant, or significant?

The answer lies in the speed of both moves. Once the AUD uptrend line was broken near $0.765 it has taken less than 3 weeks to touch $0.74. The AUD chart is defined by trading bands. The lower edge of the trading band is near $0.74. The upper edge near $0.775. The breakout above $0.775 had a target near $0.81. This was achieved.

A fall below $0.74 has a downside target near $0.715. This is calculated by taking the width of the trading band and projecting it downwards.

The speed of the rally in the Australian Index is equally astounding. In six weeks it has rallied from near 5750 to 6150. This is a very fast market rally and rallies of this nature are unsustainable. This is an exceptionally fast flow of money into the market and a good example of irrational exuberance as there are limited sound fundamentals to support this confidence.

The trajectory of the Aussie dollar suggests the way this contradiction may be resolved with the Aussie market moving back into sync with the Aussie dollar.

That's not to say we are looking at a trend change, but traders are alert for evidence of consolidation and a pullback in the Australian market particularly if the Aussie dollar fails to hold support near $0.74.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders, which can be found at www.guppytraders.com. He is a regular guest on CNBC Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe. He is a special consultant to AxiCorp.

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