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AUD/USD Intermarket: Is strong AUD responsible for under performance of ASX 200?

ASX 200 rose to 1-1/2 year high in January this year, but since then has been steadily losing height. The retreat contradicts the record highs in the US stocks and the rally in European and Asian majors.

The rally in gold, copper and iron ore continues. Gold rose to highest level since November. This has helped AUD/USD stage a near 600 pip rally from the December low of 0.7160.

AUD/USD breached the short-term downtrend line (drawn from November 9 high and December 14 high) on January 10. Interestingly, the ASX 200 index topped out on January 10 as well. Thus, the strength in the AUD could be blamed for the underperformance of the ASX 200.

The other factor that is being blamed is the losses in the banking shares. Money markets suggest only 15% probability of a RBA rate hike this year. On the other hand, Fed is widely expected to hike rates at least twice this year. Moreover, very low probability of RBA rate hike as compared to Fed rate hike means less incentive to hold Aussie bank stocks (relatively flat Aussie bond yield curve). Consequently, Australian banking stocks have come under pressure.

The index may regain poise if the RBA reiterates dovish view this week, leading to weakness in the Aussie dollar.

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