AUD/USD: Buy On Weakness An Interesting Proposition

What one should notice in the Aussie market, as the 5-day correlation coefficient shows, is that it’s all about the direction of the Yuan + DXY to gauge the next bias. The S&P 500 is taking up the slack and playing a greater role in line with historical standards, while the yield spread correlation between the Australian and the US economy is now having a lesser impact.

As technicals and intermarket flows stand, this is the clearest market to get a signal from. When analyzing the DXY+Yuan as one driver alongside the S&P 500 as the #1 proxy for risk amid a risk profile environment dominated by stocks vs bond yields, here we can see that both the micro and macro slopes have turned upwards, which adds credence to the breakout of 0.7130 resistance. The improved technical outlook allows for the run-up to extend towards 0.7195–0.72 resistance. There are two downsides to the near term outlook though. Firstly, the price has clearly entered overbought conditions according to the slow stoch. Secondly, the Aus-US yield spread cannot be stripped out as it has played a leading role as of late. If the narrative were to shift back to the yield spread via an increasingly tighter correlation (currently at 0.3), the case for lower levels strengthens. The green box drawn should be a sensible area to engage in buy-side action should IMFs still agree.