The Currency Comeback From Down Under

I have more than a passing interest in the Australian dollar because my wife is from Queensland, and we travel there at least once a year. On our most recent sojourn down under in late 2001, Aussie dollars cost as little as US$0.48, an all-time low that essentially made goods there half-price to holders of American greenbacks.

But the Aussie dollar is making a comeback, showing signs of accelerating momentum. One of the things I look for to gauge the strength of the momentum in a market is a critical mass of gaps, laps or expansion bars within a condensed time frame. (A lap up occurs when the open is above the previous day's close, and an expansion of range occurs when a move is the largest of the past five days.)

When five or more of these signals occur within a month, this indicates the market has the potential to really accelerate. If more occur within a shorter time frame, this indicates even more potential momentum.

Action in Australian dollar futures (ADM2:CME) over the past two days has been noteworthy in this regard. On Friday, Aussie dollar futures gapped to a contract high. On Monday, they rallied in their biggest up day in more than a week in an expansion of range. Looking at the chart, you'll see there are now nine gaps, laps or expansion bars over the past 14 sessions.

Several fundamental factors are also working to potentially sustain a rally in the Aussie dollar. First, the Australian dollar is considered a commodity currency, meaning that the direction of commodity prices influences its value.

Indeed, the mining and petroleum industry is Australia's largest export earner. (The Canadian dollar (CDM2:CME), which I wrote about last month, is also considered a commodity currency.) Gold, which hit contract highs Monday, is also a factor, as Australia is the world's third-largest producer of the metal.



Compared to other advanced economies, Australia's economy has been relatively less harmed by the recent global slowdown. The country's relatively better-performing economy has already spurred the Bank of Australia to tighten monetary policy, helping its currency to rally on the better interest-rate differential. The government is forecasting fiscal 2003 economic growth of 3.75%, and a projected government budget surplus and falling joblessness also contribute to the bullishness.

In fast-moving markets, getting in on a pullback can be one of the best possible plays. If Aussie dollar futures pull back, they could hold above the most recent gap above 0.5490.

In other markets, the euro FX (ECM2:CME) is at a six-month peak and en route to contract highs after tagging the bottom of a recent flag formation. The move out of the flag firmly reasserts the uptrend (and the downtrend in dollar index futures (DXM2:NYBOT)), although the euro FX must now contend with a weekly double-top formation.



In agriculture markets, the soybean complex -- beans (SN2:CBOT), meal (SMN2:CBOT) and soybean oil (BON2:CBOT) -- has cycled into a momentum phase, and cattle continues to break down. (See cattle commentary from April 11, April 23 and May 17.)

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