Commodity Demand Boosts Aussie Dollar

The AUD USD rosesharply overnight, negating Monday’s closingprice reversal top on prospects global growth will boost demand for commodities.Trader sentiment has rapidly shifted toward risk as the markets appear to haveabsorbed the potentially bearish situations in Japanand the Middle East.

The AUD USD rosesharply overnight, negating Monday’s closingprice reversal top on prospects global growth will boost demand for commodities.Trader sentiment has rapidly shifted toward risk as the markets appear to haveabsorbed the potentially bearish situations in Japanand the Middle East.

The rally to 1.0332took the Aussie to its highest level since it was freely floated in 1983. Thequick turnaround the past two days has helped form a new minor bottom at 1.0204.A trade through this level will likely trigger stops and encourage positionlightening, however, upside momentum appears to be strong enough to make thisprice level a non-issue at this time.

With inflation andcommodity demand the talk at this time, expectations are for demand for theAustralian Dollar to remain steady. Also driving this currency higher is theimproving outlook for China.Analysts are calling for China’sPurchasing Managers’ Index to show a rise from 52.2 in February to 54.0 inMarch. Commodity exports play a major role in Australian economic growth.

In addition togreater demand for commodities, both retail sales and home-building approvalsare expected to show improvement, applying further support for the AustralianDollar.

Although the skyseems to be the limit at this time for the Aussie if you look at the commoditydemand picture, there is still a portion of the rally which can be attributedto the higher yields being offered by Australia. Currently its benchmarkrate stands at 4.75, but hawkish talk from another Fed official may lead tosome position squaring in the near future. To clarify, a tightening of U.S. interestrates will squeeze the interest rate differential between the two countries abit, leading to profit-taking and setting up the potential for short-termweakness.

The new round ofhawkish talk is coming from DallasFedPresident Richard Fisher. He said late Tuesday that he would vote against anyfurther monetary easing by the central bank. Although sentiment appears to bebuilding for an end to the current quantitative easing program, scheduled towrap-up in June, the Fed is not likely to make a change without sending themarket a warning, and at this time, no warning has been issued. So basically itcomes down to a credibility issue rather than an economic issue.

Recently the Fed hashad to deal with the possibility of a double-dip recession because of thestrong surge in oil prices. This, however, does not seem to be a concern atthis time and appears to have been driven by fear and rumors. The whispernumber for high priced crude causing a double-dip recession appears to be $140per barrel. The taming of the situation in the Middle Eastappears to have eased these fears.

The resiliency ofthe U.S.economy cannot be denied at this time, however, despite the fact that housingand employment continue to be major concerns. The Fed’s Fisher must be lookingat the economy the same way or perhaps he figures that excessive liquiditybeing pumped into the economy may cause inflation or some sector bubble. “Iwill vote against…any further extension of that program,” Fisher told FoxBusiness News, taking aim at the Fed’s $600 billion asset-purchase program. “Icannot foresee a circumstance where I can support any further liquidity in theeconomy,” he said.

While his commentsare a matter of record, they are not going to be strong enough to sway themajority of the Fed members. In the meantime, this kind of talk is good formarket volatility. There are signs this morning that position squaring issupporting the Dollar, but nothing to indicate a major change in trend isimminent.

James A. Hyerczyk has been actively involved in the futures markets since 1982. He has worked in various capacities within the futures industry from technical analyst to commodity trading advisor. Using W. D. Gann Theory as his core methodology, Mr. Hyerczyk incorporates combinations of pattern, price and time to develop his daily, weekly and monthly analysis. His firm, J.A.H. Research and Trading publishes The Forex Pattern Price Time Report... More

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