The Australian Dollar Breaks Out As It Regains Correlation With The S&P 500

(This is an excerpt from an article I originally published on Seeking Alpha on January 11, 2013. Click here to read the entire piece.)

On Thursday, January 10th, China reported export growth much larger than forecasters expected. {snip} This surge helped push the Australian dollar (FXA) far enough to finally break a long-standing downtrend against the U.S. dollar.


The Australian dollar FINALLY breaks its downtrend versus the U.S. dollar
The Australian dollar FINALLY breaks its downtrend versus the U.S. dollar

The timing of the breakout is notable because at the same time, the S&P 500 (SPY) rallied to the edge of last year’s triple top, the first leg of which occurred on September 14th, the day after the U.S. Federal Reserve announced QE3. {snip}


The S&P 500 challenges the first and highest leg of the triple top
The S&P 500 challenges the first and highest leg of the triple top

Source for charts: FreeStockCharts.com

In other words, the typically strong correlation between the Australian dollar and the S&P 500 that I have frequently referenced had broken. The correlation is now poised to re-establish itself with the breakout of AUD/USD and the testing of 52-week and multi-year highs by the S&P 500. The key to resolution of this convergence may be iron ore prices.

{snip} Last August, the blog “Brazilian bubble” posted a chart showing the strong correlation between the Australian dollar and iron prices with this summary:

“The rolling annual correlation over the entire period 2005 to current runs at around 70%, and through 2008-2010 this was closer to 90%. By contrast, in the year to date correlation is running at just 12%.”


Iron ore versus Australian dollar as of August, 2012
Iron ore versus Australian dollar as of August, 2012

{snip} In just four months, iron ore has gone from three-year lows to 15-month highs!


Iron ore prices have swung wildly over the past 12 months
Iron ore prices have swung wildly over the past 12 months

Source: The Sydney Morning Herald

Note that the Australian dollar actually sold-off during the first half of the acceleration in iron ore prices in December. It seems that instead of a tight correlation, iron ore is now leading the Australian dollar. {snip}

…A continued rally across the board would be a powerful confirmation of bullish momentum in financial markets. A coordinated pullback might confirm that markets have rallied beyond what the economic fundamentals will support. {snip}

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on January 11, 2013. Click here to read the entire piece.)

Full disclosure: long SSO puts, short AUD/USD

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