As we reported in the middle of August, the Australian Dollar, and other ‘risk on’ asset classes were at a cross-roads.
A range of elements, including several points of confluence provided by a range of the proprietary Icarus Indicators suggested that a continued move higher from resistance at 0.7220 may be stymied by some weakness in the longer-term charts.
In following sessions, as global markets stalled and risk-off crept into view, the Australian dollar was pressured, and as expected, failed to push through convincingly.
After a range-bound period between the 18th and 26th of August, the currency broke out strongly, and has hit highs not yet seen since November 2018.
Oddly, the ultimate risk measure of VIX has risen rather quickly, in the face of continued asset price increases.
This is an odd occurrence, and as suggested by the team at Zerohedge, is very rare.
Needless to say, in a healthy bull market at its best levels, the VIX should be in the low teens, not the lows 20s as shown in the chart above. In fact, as we showed previously, the correlation between volatility and equities was at the highest since January 2018, just days before the Volmageddon event of Feb 2018.
As we look at the correlation between VIX and AUD/USD, we expect the rising AUD to come under pressure again, with a return to the previous resistance level of 0.7220, after which a clearer picture will eventuate as other correlations and economic matters prove out.
The overarching DXY position is something to pay careful attention to. The basket of currencies against the USD is approaching levels not seen since April 2018. After a test of the previous lows on 18th August, a critical time has arrived. When compared to the AUD action, we can see that the current lebvel of AUD correlates with a previous area of consolidation and compression in the DXY. This will be regarded as a less powerful indicator given the DXY basket’s construction , but is more likely to support the Icarus position that suggests a return to resistance of 0.7220 is likely before any further concerted move higher
Chart of the Day
‘Not the right time’ for increasing Aussie Dollar