Dollar strength hurts Aussie gold stocks

China’s Yuan continues its steep descent against the US Dollar.


The weakening Yuan strengthened demand for Dollars, with the Dollar Index breaking through strong resistance at 95. Expect retracement to test the new support level. Respect would confirm the long-term target at the 2016/2017 highs of 103.

Dollar Index

The strong Dollar weakened demand for Gold, with the spot price heading for $1200/ounce after breaching short-term support at $1220.

Spot Gold in USD

A long-term gold chart shows likely support levels at $1150 and $1050/ounce.

Spot Gold in USD - Quarterly

The Australian Dollar continues to range between 73.50 and 75.00 US cents, leaving local gold miners exposed to the falling Dollar price.

Australian Dollar/USD

The All Ordinaries Gold Index (XGD) is testing support at 4900. Breach is likely and penetration of the rising trendline warns of a strong decline, with a LT target of 4100.

All Ordinaries Gold Index

A sharp fall in the Aussie Dollar would soften the blow. But hope isn’t a strategy.

Bears in the East, Bulls in the West

Market fears of a trade war appear to be easing but investors in China and South Korea remain cautious.

The Shanghai Composite Index is retracing to test resistance at the former primary support level at 3000.

Shanghai Composite Index

Dow Jones – UBS Commodity Index shows a similar retracement in commodity prices.

DJ-UBS Commodity Index

While crude oil prices have found support at the LT rising trendline.

Nymex Light Crude

South Korea’s Seoul Composite Index is in a primary down-trend but retracement to test the former primary support level at 2350 is likely.

Seoul Composite Index

Japan is more isolated and the Nikkei 225 is testing resistance at 23,000. A rising Trend Index suggests that breakout is likely, which would test the January high at 24,000.

Nikkei 225 Index

India is stronger, with the Nifty breaking resistance at its January high of 11,100 to signal a primary advance with a target of 12,000. But first, expect retracement to test the new support level.

Nifty Index


Dow Jones Euro Stoxx 600 was boosted by news that the EU-US trade dispute is settled. A Trend Index trough above zero signals strong buying pressure. and another test of 400 is likely.

DJ Euro Stoxx 600 Index

A bullish saucer pattern on the Footsie suggest further gains. The Trend Index trough above zero indicates buying pressure. Breakout of the index above 7800 would signal another advance, with a target of 8200.

FTSE 100 Index

North America

The Nasdaq 100 retreated when Facebook (FB) and Twitter (TWTR) reported disappointing growth for the quarter. Bearish divergence on the Trend Index warns of selling pressure but this appears secondary and support at 7000 is likely to hold. Respect would confirm another advance.

Nasdaq 100

Friday’s retreat is also evident on the S&P 500 daily chart. Expect retracement to test new support at 2800. A strong GDP result should strengthen support.

S&P 500

Canada’s TSX 60 retraced to test the new support level at 970. Respect would signal a test of 1000 but breach is as likely, testing support at 940.

TSX 60 Index

Gold breaks support

The Dollar price of gold has broken support at $1240/ounce, signaling a primary down-trend.

Spot Gold in USD

The Dollar Index continues to test resistance, consolidating in a narrow band below 95, a bullish sign. Chinese selling of the Dollar, to support the Yuan, has not materialized in sufficient magnitude to reverse Dollar strength. Breakout above 95 would spur selling of gold.

Dollar Index

The Australian Dollar has not weakened sufficiently to protect local gold miners. The All Ordinaries Gold Index (XGD) is heading for a test of support at 4900/4950. Given the circumstances, support is unlikely to hold. Expect a test of 4600.

All Ordinaries Gold Index

Trade tariff impact on China & Australia

The yuan is falling as threat of a tariff war rises.


The Shanghai Composite Index is testing its 2016 low at 2700. Breach would warn of a decline to the 2014 low at 2000.

Shanghai Composite Index

Commodity prices are plunging in anticipation of falling demand from China.

DJ-UBS Commodity Index

Chinese monthly iron ore imports are down at 83.24 mt, compared to earlier peaks of 100 mt earlier in 2017. Iron ore spot price is testing primary support $63/tonne. A Trend Index peak below zero warns of selling pressure. Breach of support is likely and would warn of a decline to $58/tonne.

Iron Ore

A falling Aussie Dollar may cushion local resources stocks from some of the impact.

Australian Dollar

But ASX 300 Metals & Mining index continues to test medium-term support at 3800. Breach of support is likely and would warn of a correction to test the rising trendline.

ASX 300 Metals & Mining

Resources stocks remain in a primary up-trend but I am bearish on the medium-term outlook.

Gold, Dollar and the Yuan

China’s Yuan fell sharply over the last 3 weeks, with the threat of US trade tariffs.


Risk of capital flight will force the PBOC to sell foreign reserves to support the Yuan. It took $1 trillion to stem the last fall, so expect a sizable sell-off in Chinese holdings of US Dollar assets, mainly Treasuries and mortgage-backed securities. The outflow is likely to weaken the Dollar, which is likely to strengthen Gold.

The Dollar Index encountered stubborn resistance at 95. Respect would warn of another correction.

Dollar Index

Gold found support at $1250/ounce. Respect of the primary support level would suggest another rally.

Spot Gold

The Aussie Dollar is likely to strengthen if the US Dollar falls.


A stronger US Dollar is expected to be mildly bullish for Australian gold stocks, with a stronger Aussie Dollar offsetting some of the gains.

The All Ordinaries Gold Index broke through resistance at 5250, signaling a primary advance with a target of 6000. Follow-through above 5300, after the recent retracement, would strengthen the signal.

All Ordinaries Gold Index

ASX 200: China threat

A rapidly falling Chinese Yuan highlights the threat of trade tariffs to the Chinese economy.


Expect another sell-off of foreign reserves by China, as in 2015 to 2016, in attempt to stabilize the Yuan and head-off a major capital exodus. The sell-off would weaken the Dollar and Chinese exports.

China Foreign Reserves

Significant monetary easing by the PBOC is also likely, to stimulate domestic demand. Driving the Debt-to-GDP ratio into the stratosphere.

The Aussie Dollar would act as a shock-absorber, following the path of the Yuan.


Cushioning the blow to Australian exporters.

So far, Resources stocks are unfazed. The ASX 300 Metals & Mining index is consolidating below 4000.

ASX 200

The ASX 300 Banks index ran into stiff resistance at 8000. Expect another test of primary support at 7300 but this is not related to trade tariffs.

ASX 300 Banks Index

The ASX 200 appears unperturbed by the international turmoil, retracing calmly to test its new support level at 6150. Respect would signal another primary advance, with a target of the October 2007 high at 6750.

ASX 200

S&P 500 retraces while Shanghai shudders

The S&P 500 retreated from resistance at 2800. Retracement is modest and I expect support above the rising trendline (2700). Volatility (Twiggs 21-Day) is below 1.0%, indicating that market risk has returned to normal levels.

S&P 500 and Twiggs Volatility

The tech-heavy Nasdaq 100 is in a stronger position, making a new high at 7300, but is now likely to retrace to test the new support level at 7000. I am wary of Twiggs Money Flow as a lower peak would signal bearish divergence. A lot will depend on how buyers react at the new support level.

Nasdaq 100

China’s Shanghai Composite Index, on the other hand, broke support at 3000, signaling a primary decline. Initial target is the February 2016 low at 2700.

Shanghai Composite Index

Hong Kong’s Hang Seng Index weakened in sympathy. Breach of support at 29000 would signal a primary down-trend.

Hang Seng Index

Zombie banks or zombie economies?

The last three decades was the era of zombie banks, with financial crises threatening the very survival of our financial system. Major banks close to the edge of the precipice, first in Japan but followed by the USA and Europe, were only rescued by drastic action by central banks. The flood of easy money kept the zombie banks afloat but every action has unintended consequences, especially when you are the Fed, BOJ or ECB.

Fed Balance Sheet and Funds Rate Target

Now that the Fed is attempting to unwind its swollen $4.4 trillion balance sheet — see The Big Shrink Commences — and normalize interest rates, Stephen Bartholomeusz at The Age highlights some of the unforeseen consequences:

US rate hikes are already sending threatening ripples through other economies as capital flows towards the US and the US dollar strengthens.

Argentina has sought assistance from the International Monetary Fund. Turkey, Indonesia, the Philippines, Brazil, India and Pakistan have all been forced to raise their rates to defend their currencies.

US monetary policy and its rate structure is setting it apart from most of the rest of the developed world in a fashion that will impose pressure on economies that may be more fragile than they might previously have been regarded in an ultra-low global rates environment.

…..A consequence of the policies pursued by the Fed, the ECB and the Bank of Japan since 2008 has been a significant increase in global debt – at government, corporate and household levels – as ultra-low rates and torrents of liquidity ignited a global borrowing binge.

There was a particular appetite in developing economies for US dollar-denominated debt, which became abundant and cheap as US investors were incentivised and enabled by the Fed to take on more risk in return for higher returns.

The US rate rises, combined with a stronger US dollar, are now putting a squeeze on emerging market economies.

If the ECB were to also start unwinding its stimulus, economies and banking systems within the weaker southern regions of the eurozone would come under intense pressure, along with more debt-laden companies.

It shouldn’t come as a surprise to anyone that after a decade of unprecedented policy interventions in economies and markets there could be unintended consequences that emerge as those policies are wound back.

The ECB indicated overnight that it will halt bond purchases at the end of 2018 and plans to keep interest rates accommodative “through the summer of 2019 and in any case for as long as necessary…”

ECB unwinding still appears some way off but tighter monetary conditions emanating from the Fed may be sufficient. Developing economies that gorged on low-rate US dollar-denominated debt during the liquidity surge are finding themselves in difficulties as the tide goes out.

Meanwhile in Australia

From Karen Maley at the AFR:

Australian banks are being squeezed by higher borrowing costs as the US Federal Reserve accelerates its interest rate hikes and drains liquidity from global financial markets…..

The woes of the local banks have been exacerbated by an unexpected and savage spike in a key Australian short-term interest rate benchmark – the three-month bank bill swap rate, or BBSW, in the past few weeks.

Analysts estimated that the spreads paid by Australian banks have climbed by close to 40 basis points since the beginning of the year, which has swollen the wholesale borrowing costs of the country’s banks by some $4.4 billion a year.

The ASX 300 Banks Index is headed for a test of primary support at 7000/7200. Breach of 7000 would warn of another decline, with a long-term target of the September 2011 low at 5000.

ASX 300 Banks Index

Aussie banks are being squeezed by higher interest rates on their international borrowing but are unable to pass this on to borrowers for fear of upsetting the local housing market. House prices are already under the pump, especially in the top end of the market.

Zombie banks would be too harsh but Aussie banks are in for a rough time over the next year or two.

China sees red

From Darren Gray & Kirsty Needham at The Age:

Relations with China have taken another backward step after one of Australia’s biggest exporters, Treasury Wine Estates, was among several companies whose products were being stalled because of new customs rules targeting Australian companies and industries….

2018/2019 Budget Net Debt and Fiscal Deficit/Surplus

“Chinese officials have introduced new and different verification and certification processes and we’ve been working with the Chinese authorities and the officials, as well as with Australian authorities and officials, to ensure that we can meet these new and additional processes, which are not just applied to Treasury Wine Estates, it’s being applied to a number of other companies, across a number of different industries from Australia,” Treasury boss Michael Clarke said.

Australian Trade Minister Steven Ciobo said in Shanghai he had been informed of the situation by Treasury, the largest importer of foreign wine into China, in the past 24-36 hours.

“The questions being asked relate to certificates of origin. We will look at precisely what the situation is and if we can get to the bottom of it,” Mr Ciobo said.

….Amid a looming trade war between the US and China, and threatened punitive tariff packages worth hundreds of billions of dollars, American exporters have also reportedly encountered pre-emptive slow downs and extra scrutiny from Chinese customs in recent weeks.

China is attempting to use trade relationships to coerce trading partners into complying with their political demands, applying Lenin’s dictum “Probe with a bayonet. If you meet steel, stop. If you meet mush, then push.”

Australia faces a clear choice. Acquiesce and the trade issues will likely disappear…for a short time until China wants something else. Effectively we will become China’s southernmost province, responding to the will of the Central Committee in Beijing.

The alternative is a lot tougher: politely but firmly resist any pressure from Beijing and demand to be treated as an equal partner in international relations. The price is high but the rewards are far greater. Our freedom and independence.