Here’s What The CRB Index Is Indicating

  • March 3, 2005
  • Dave Floyd

The
recent performance in AUD/USD should come as no surprise.  We had
noted on Monday that the technical picture was deteriorating and that the number
of speculative positions had grown to a level that suggested further upside was
somewhat limited.  The anticipated rate hike on Tuesday afternoon (Wednesday in
Sydney) did little to buoy AUD bulls hopes as the currency was quickly sold off
towards .7770.  It would appear at this point that many of the “weak” longs have
been flushed out.

Regardless of the technical
backdrop, which is quite poor across multiple time frames currently, there is
still a solid macro backdrop in Australia that we will bullet point here, that
should force us to keep an eye out for long AUD/USD entries going forward.

We mentioned in a piece a
few weeks back how identifying a countries largest net export (commodity) can be
a good barometer to determine currency values as the price of that export
increases/decreases.  Australia is largely a commodity-based economy with iron
ore making up the largest component of the ‘metals’ component of exports. 
The most
important news for the AUD over recent weeks has been the announcement of
larger-than expected price increases in bulk iron ore contracts for 2005. 
Companies like Rio Tinto and BHP Billiton have just, or are in the
process of negotiating favorable 2005 contracts with prices upward of 70%. 
These contracts will come into effect later in the spring and will likely propel
commodity prices higher.


Using some back of the
envelope calculations from our last article regarding the effect of commodity
prices on currencies, we had determined that a 10% increase in the price of
industrial metals could result in as much as a 3.4% increase in the AUD.


-   Furthermore, a net
increase in commodity prices would also lead to an increase in export prices. 
This would clearly put downward pressure on the Australian trade deficit to
perhaps under 3% of GDP — a situation that seems less likely in the US.


-  Monetary policy,
while Australia and the US are in the process of tightening, Australia still
offers 300 bp’s over US overnight rates.


-  Evidence of very strong growth in China and other
commodity intensive countries supports the idea that global demand for
commodities will remain relatively firm during 2005.

^next^


Technical Backdrop

As mentioned above, the
intra-day models that we monitor, 60, 120 and 240-minute charts not only are not
applicable to the analysis mentioned above, they are simply exhibiting sideways
and corrective moves. 

The daily chart has a bit more
promise to it, although not currently.  Nonetheless, with some solid fib and
trend-line support coming up (see chart below) a basing period may well occur in
the days and weeks ahead.

Also, the CRB Index is
indicating that higher commodity prices are in the cards as a previous high from
back in 1979 (314.50 & 337.60) are within reach.

As always, feel free to send me
your comments and questions.


Dave