The Case for Higher Equities, a Stronger USD and Weaker Commodities


The US 10’s are yielding 1.33% and the Aussie 10’s are 1.20%.

That spread (difference) between the US 10 Government Bond Yield and the Australian 10 Year equivalent is currently 0.13%.

But the figure doesn’t really matter, it’s the direction of the trend which is of greater importance.

As we see today………a rising trend (and when coupled with a break above a trend line) portends greener pastures for equity prices.

Below you will find a ‘close-up’ of a Weekly chart, highlighting the current ‘break-out’, while the 40 year chart (on a Monthly basis) illustrates a rising trend (of the spread) equating to an advancing S&P 500 (SPX), while a decline trend results in a lower or sideways travel.

A rising trend in this interest rate differential tend to also equate to a stronger US Dollar, which in turn means a weaker AUD.

Which…..also correlates to weaker commodity prices.

This is an indicator worth watching for your macro and longer term positioning.

Who would think we’d see a stronger US Dollar?

Rising yields on U.S. Treasuries will prolong the advance in the Dollar.

And rising interest rates add to debt servicing stress which can lead to Sovereign Debt pressure (there is no use calling it a crisis, until it becomes one) at which point the U.S. Dollar remains the currency of ‘last resort’.

This can lead to more buying of the U.S. Dollar.

See how this scenario can develop?

August 11, 2021

by Rob Zdravevski

rob@karriasset.com.au

Nat Gas may halve before it doubles again

Lately, I’ve been calling an interim top in Crude, highlighting extreme overboughts in Gasoline, Heating Oil and Distillates and a peak in the Australian Dollar.

Natural Gas has also touched some extreme overboughts where a Long trading exit target of $4.07 was hit.

Now, I think petroleum prices ease lower over the medium term while Natural Gas may nearly halve in price in the next 10 months or so.

Crude prices lead Natural Gas prices. Crude is down $12 since I made my recent ‘top’ call.

Below is picture of how I think it may play out.

You can see the resistance and supports it needs to test or break and this will help tell me if I’m wrong.

If the scenario below evolves, you’ll also see weaker (commodity) currencies such as the AUD and CAD while the U.S. Dollar strengthens.

August 9, 2021

by Rob Zdravevski

rob@karriasset.com.au

As goes Oil, so does the AUD

And as a follow up to the previous Brent Crude oil post,

the chart below may tell us what happens to the Australian Dollar compared to the U.S. Dollar…..

should Brent Crude decline

June 28, 2021

by Rob Zdravevski

rob@karriasset.com.au

Short term AUD FX range

During this week of October 5th-9th, if the AUDUSD stays under 0.7280 but breaks below 0.7030, then I’ll look for lower prices.

It’s 0.7168 as I write this.

Similarly, if the AUDJPY stays below 76.40 and breaks under 73.95 (it’s 75.68 at the moment), it will add weight for lower equity indices.

Incidentally, Bitcoin’s support level is ~ $10,320

Failure of these short-term support level should have mimicking effect on other asset classes.

AUD – now Overbought at a Weekly Extreme

I feel markets are at another acute point.
It’s not about doom but rather to position for the opportunity.

In this note, I’ll start with the AUD and USD.

Since Buying AUD in the depths of March 2020, I’ve been advising clients to sell AUD against the USD in a tiered fashion at 0.66, 0.69 and 0.71.

With a weaker USD, we have also seen a commensurate advance in commodity prices. Note the link ?

I’ve been banging on about overbought readings recently each time they were registered on the “daily” charts, BUT now, significantly, we are seeing “Weekly” extremes.

Please take a look at the AUD/USD chart below and my annotations within it.

It’s only the 10th time in past 18 years that we have seen this and it’s the first time in 9 years.

I’m not calling a crash and of course and 0.7750 is entirely possible but I want to identify that such extremes are not common. Buying AUD at this end of the pendulums arc warrants thought to the probability of mean reversion.

September 1, 2020
by Rob Zdravevski
rob@karriasset.com.auAUD Weekly

Australia’s Inverted Yield Curve – Update

Today, the RBA’s cash target and overnight rate is 3.50% compared to the yield on the Australian 10 year government bond of 3.33%.

The yield curve remains inverted. If the RBA cuts rates another 25 basis points to “un-invert” the curve, they risk a weakening of the AUD (which should be desired in order to make Australian exports competitive) as global capital will earn less on their carry trade and perhaps sending a signal that the economy actually needs a larger kick of stimulation that what was thought.

When I combine our observations in the credit markets, the analysis is suggesting (which is being confirmed with action seen Asian equity markets) that the short-term trends in the AUD and the ASX 200 are shifting into weakness.

It is worthy to note that the yield curve is close to being normal again.

At this stage, I view this short-term correction as an opportunity to accumulate selected Australian equities. I feel that the Aussie equities index (together with Shanghai) will see it’s low for 2012, a couple months earlier than the yearly lows that I anticipate to occur in the U.S. which surrounds the November period.

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