Is the Australian Dollar Hurting the ASX?


AUD/USD & ASX 200 Price Outlook:

  • The Australian Dollar has climbed well above its pre-covid levels and could climb further
  • The ASX 200 has failed to retake its pre-covid peak and recent price action has seen the index fall
  • Have AUD/USD and the ASX 200 returned to their fair values where further Aussie strength might hamstring the ASX 200?

AUD/USD & ASX 200 Forecast: Is the Australian Dollar Hurting the ASX?

The coronavirus outbreak dealt a vicious blow to both the Australian Dollar and the ASX 200, two markets that are closely aligned with global growth expectations. In the months that followed, the Australian Dollar eagerly clawed back losses and even surpassed its pre-covid levels in some pairs like AUD/USD.

AUD/USD Price Chart: 4 – Hour Time Frame (May 2020 – September 2020)

By comparison, the ASX 200 saw its recovery rally top out in June, well beneath its trading price in early February. Evidently, the two Australian markets have begun to diverge somewhat as AUD/USD drives higher and the ASX 200 flounders beneath prior highs. With both markets sensitive to shifts in risk appetite, why has one continued higher while the other faces weeks of indecision?

ASX 200 Price Chart: 4 – Hour Time Frame (May 2020 – September 2020)

asx 200 price chart

Well, it is difficult to say for sure, but one consideration may be the relationship between a country’s currency and equity market. Typically, there is a degree of negative correlation – meaning when a currency rises in value, its stock market might fall.

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This relationship is particularly noteworthy in economies that rely more heavily on exports, like Australia. That said, this traditional macroeconomic relationship effectively went out the window in the wake of covid as almost every asset with growth sensitives was battered.

ASX 200 to AUD/USD Ratio Price Chart

aud/usd and asx 200 price chart combined

Chart created in TradingView

The market dynamic also fell to the wayside once the recovery began as investors and traders began to buy back into growth-linked assets hand over first. Consequently, a rapidly increasing currency price did not necessarily have the negative impact it might usually. With AUD/USD pressing beyond pre-covid highs and the ASX 200 negotiating persistent weakness, perhaps a strong currency is to blame for the equity market’s recent struggles.

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Either way, I would argue this relationship warrants consideration when trading the two Aussie assets as AUD/USD looks to attack its September high and the ASX 200 crumbles toward support. If risk aversion picks up in a meaningful way, the markets might become more closely correlated once again and threaten any technical pattern that had been developing – something to consider with the hot Nasdaq 100 stocks showing signs of weakness. In the meantime, follow @PeterHanksFX on Twitter for updates and analysis.

–Written by Peter Hanks, Strategist for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX

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