AUD USD s correlation with cheapening copper could prove catastrophic

Last week, we looked at the weakening correlation between the value of the Canadian dollar and oil prices, noting that, “It seems unlikely that this typically tight correlation has broken on a sustainable basis, so it will be interesting to see whether oil sees a notable bounce next week or whether the loonie depreciates meaningfully to “catch down” with the recent fall in black gold” (see “Has the correlation between oil and USD/CAD gone loonie?” for more). While we haven’t seen a resolution to that divergence yet, there is another currency pair/commodity correlation that may come to the fore this week.

The Australian dollar is generally closely correlated with base metals such as iron ore and copper, and while the former has managed to stabilize over the last few weeks, copper has continued to tumble. Earlier today, copper dropped below $5,000 per metric ton in London trading. Beyond representing a significant psychological level, this is also the lowest price for the metal since the Great Financial Crisis in 2009. From a fundamental perspective, much of the recent decline can be chalked up to fears about China’s economy, which has recently slowed down to “just” 7.0% growth in the official numbers, though many analysts suspect the economy is actually growing at an even slower rate.

If copper is unable to recover from its big breakdown, it would bode ill for the Australian dollar. Last night’s RBA minutes showed that the central bank is firmly on hold, though it appears that the central bank wouldn’t mind seeing continued depreciation in its currency. To wit, the minutes noted that, “it was likely that financial market volatility would increase and the US dollar could appreciate further, including against the Australian dollar” if and when the Federal Reserve raises interest rates. The minutes also stated that China’s “policy response to the recent volatility in Chinese equity markets had clouded the medium-term economic outlook” for Australia’s economy.

At this point, the key technical level to watch on AUD/USD (left axis) is .7250, which represents previous support from earlier this month and late July. Especially if the price of iron ore starts to edge lower as well, the Aussie could retest or break this key support level later this week. Meanwhile, a recovery in copper may alleviate one bearish catalyst for AUD/USD, but without any bullish fundamental news, the pair could still remain rangebound below .7400-50.

Source: City Index

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD and Forex Trading are leveraged products and your capital is at risk. They may not be suitable for everyone. Please ensure you fully understand the risks involved by reading our full risk warning.

City Index is a trading name of StoneX Financial Ltd. Head and Registered Office: 1st Floor, Moor House, 120 London Wall, London, EC2Y 5ET. StoneX Financial Ltd is a company registered in England and Wales, number: 05616586. Authorised and regulated by the Financial Conduct Authority. FCA Register Number: 446717.

City Index is a trademark of StoneX Financial Ltd.

The information on this website is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement.