China was one of the economies to escape the 2008 recession exporting products world wide at a fraction of the cost. Australia was one of China's largest trading partners with Iron ore and other raw materials being of interest.
Now that China is looking to reduce its carbon footprint across the world and looking at greener ways of production their appetite for materials like iron ore and coal have plummeted. These are 2 core exports from Australia which they're losing out on!
On top of this China's housing sector starts to slow with one of the largest property developers Evergrande nearly going bankrupt last week missing a $280 million coupon payment which could significantly rattle the global markets as this would throw billions down the drain.
This is starting to show in economic data and on our economic indicators/ currency strength meter.
Logikfx Technology Summary
The Logikfx Technology Summary page in our LITA tech gives our users a unique fundamental outlook of the markets in a single view. On the right hand side we have the red arrows all showing bearish data. In the centre we can see a detailed currency strength meter between AUD and NZD, then below this we can see the most recent changes in the GDP, Interest rates and COT reports.
Overall, the signs are clear... fundamentals are suggesting the market is looking bearish for AUDNZD meaning we should be focusing on bearish ideas. This is a great way to filter out market noise focusing on what's high probability.
Macro Currency Strength Meter
The Macro Currency Strength Meter shows how strong or weak a currency is based on fundamental data. What we can take from this is that from the start of October AUS was hovering a slightly strong macro score meaning economic data was slightly bullish... since then data has dipped and it's no surprise that the AUD seems to have followed.
On the flip side, NZD data has seen significant bullish signs since the end of September! This is a great opportunity of NZD now at a bullish fundamental region whereas AUD is in a negative. This polar opposite in fundamental data allows us traders to focus on the bearish side of AUDNZD.
Now that we have our fundamental view we can investigate further whether AUDNZD relatively is still bearish.
GDP Differential Indicator
The GDP Differentials Indicator shows us the difference in growth rates...
In this case we are comparing the growth rates between Australia and New Zealand with forecasts generated by the International Monetary Fund (IMF).
What we can gather from the analysis is that based on the GDP Differentials heading into 2022 Australia is looking to grow less than NZD... this could be the start of a significant down trend if the growth rates continue to be bearish.
Trade Analysis (Imports/ Exports)
Earlier it was mentioned that Coal is a major export in Australia, so it makes complete sense to include coal prices within the analysis. However, instead of taking the commodity price directly we've analysed a company AAL which is a major raw material miner including the likes of Iron ore.
What we've found is that over the past 10 years there's been a 50% positive correlation between AAL and AUDNZD!
This is a huge positive correlation which shows that half the time AUDNZD seems to follow AAL prices.
Most recently, AAL has started to dip... could this mean we're in for a down trend too for AUDNZD, only time will tell.
Iron ore the holy grail commodity that lies within Australia's soil is not having the best of year.
China has already publicly said they will start to reduce their carbon footprint and reduce their intake of Iron ore to reduce those toxic emissions. This fall in demand in China has shown the supply is exceed prices and with one big buyer less iron ore prices have dipped.
This fall in price shows that AUDNZD is potentially in a for a big bearish run considering there's a 57% positive correlation between AUDNZD and Iron ore.
Overall, so far we've found during the relative analysis that some of the commodities within the commodity currency are showing bearish signs agreeing with the initial fundamental view we had when taking a look at the summary page/ currency strength meter.
We're also considering A2 Milk which is showing similar signs of bearish data.
New Zealand is another economy with close links to Australia and China, again impacted by the fall in demand in China for their dairy products.
This time round there's a -51% correlation between A2 Milk and AUDNZD which means as ATM falls in price AUDNZD should rise and vice versa.
This means that due to the slight congestion and rise in prices the past few months for A2 we may see a further fall in price for AUDNZD!
Interest Rate Differentials
Interest rates there hasn't been much interesting considering the central banks around the world are halting their interest rate hikes in fear that their economies won't recover from the pandemic. It will start to show interesting signs once their monetary policies react to inflation... who will be the first to raise rates?
ASX200 - Stock Market Analysis
Overall, the Australia stock market has recovered since the pandemic... but will we see this bullish run last?
Recent price dips are starting to signal potential slow downs as we head into the winter season, dropping from the most recent highs.
This is only slightly bearish as the overall trend is bullish, if we see the stock market continue to make lower lows this will be a great fundamental indicator that AUDNZD is not in a good position.
Hedge Fund Positions - COT Report
Finally, we're onto the sentiment of the markets...
One of the most impactful ways to gauge market sentiment is to see what the big players in the market are doing on a long term basis. This helps us identify whether we're trading against the market or with the markets. In this case we can see a clear polar opposite on the COT indicator. Hedge funds are net short AUD and net long NZD, meaning they're buying AUDNZD.
The green light is starting to show... what is price suggesting?
The price trends on AUDNZD have overall been in a bearish trend since June, we saw a pullback occur last month and now it seems sellers have already started taking control!
The fundamentals look to be correct, we'll need to monitor this idea to see if the data releasing throughout the month still agrees or not.
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