Traders kept the Aussie dollar ‘safe’ after yesterday’s flat Producer Price Index figures for the March quarter and ahead of the release later today of the Consumer Price Index for the same quarter.

Zinc miner and producer, Zinifex, is getting to be an interesting situation.

There’s only one question to be answered from this week’s release of the Producer Price Index (today) and the Consumer Price Index (tomorrow) and that is will the annual inflation rate have slowed enough to ease the pressures on the Reserve Bank to lift rates?

Apart from worries about the inflation rate and interest rates, there’s nothing in the way of our market reaching another record ahead of the ANZAC Day holiday midweek.

Another strong week for commodities with gold nudging closer to the $US700 an ounce mark, copper rising through the $US3.60 /lb range and oil back over $US64 a barrel. Wheat was strong on the renewed worry about water in Australia, corn fell in the US though as did sugar while other base metals were on the whole firmer.

But could there be another explanation, and what can change the outlook for the Aussie.

It’s not so long ago the Aussie was being called the Pacific peso, now its around 17 year highs.

Is that a reflection of Australia’s strong economic performance and the resources boom, or some other factor?

Can the answer be found in the value of the $US and what’s happening in the world’s largest economy?

Perhaps but Nick Radge, our occasional chartist, thinks he has found another explanation.

……………………

What can change the outlook for the A$?

As technicians we do not concern ourselves with the never ending unknowns of what may or may not occur.

We’re only concerned with price action that validates or invalidates our chart patterns.

However, there is an interesting chart of the US Dollar Index that will have an impact on the Australian Dollar, especially for those subscribing to the concept that the Australian Dollar is actually not strong, but the US Dollar is weak.

The US Dollar Index is weighted average of six component currencies.

Contract calls for receipt/delivery of US Dollars or receipt/delivery of six component currencies.

The six currencies and their trade weights are: Euro — 57.6 per cent, Japan/yen 13.6 per cent, UK/pound 11.9 per cent, Canada dollar 9.1 per cent, Sweden/krona 4.2 per cent and Switzerland/franc 3.6 per cent.

The following chart shows the US Dollar Index back to the mid-80s at which time is was trending lower with almost unyielding weakness.

From 1989 through 1994 the Index more or less traded in a sideways pattern just above the 80.0 level before starting a multi year advance back to 120.0.

Since 2001 the Index has again dropped in a steep downtrend and again we find ourselves sitting right on the major level that supported prices from 1989 through 1994.

One thing we do know with technical analysis is that levels are reached that do mean something.

These levels tend to attract and repel prices and create areas of support and resistance.

In this case we’re seeing 80.0 tested again which in the past has acted as a serious level of support.

Is there an argument that 80.0 can yet again hold the US Dollar Index and reverse its fortunes? Quite possibly.

The one thing this chart does show is the high correlation between the Dollar Index and the current Presidential Party holding office.

For the last 20-years there has been a distinct bearish trend to the Dollar Index when Republicans have been in power and a distinct bullish trend when Democrats have been in power.

The fact that the Index is again probing the major support levels at $0.80 and that Bush Jr. is slowly but surely losing popularity and therefore quite possibly the 2008 vote, there is a good chance that we’re nearing the end of the US Dollar weakness.

Time will tell…

The Aussie dollar is trading within sight of 84 USc, the British pound has soared to the highest point in more than a quarter of a century, while the Kiwi dollar is around 22 year lows. And the US dollar is close to record lows against a lot of currencies, but mainly the euro. As you have just read these moves are as much about economic fundamentals of growth and the outlook as the impact of the commodities boom on Australia and the influence of the run up in liquidity world wide.

Our occasional chartist, Nick Radge reports:

In the December issue of AIR (#131) I discussed the possibilities of the Australian Dollar breaking higher through $0.78 and travelling onto $0.92. In the same issue it was discussed that, fundamentally, it was unlikely that the currency would break $0.80. Here we in are in April with the battler almost at $0.84 and looking very strong. My target of $0.92 remains unchanged although we could expect some short term weakness before pushing higher.

The chart pattern discussed back in December is an extremely powerful tool and any technician with a basic understanding of chart patterns will know the consequences of an Ascending Triangle. The probability that the target level of $0.92 is extremely high. We know these probabilities from a myriad of prior examples stemming from patterns on almost any tradable instrument and timeframe.

Therefore a monthly chart of the Australian dollar will have the same probability of a daily chart of Westpac (WBC) exhibiting the same pattern. This is not to say that trading such a pattern is infallible, but with such high probabilities of success and an exact point of invalidation, it offers a high risk/reward opportunity. One thing I would be looking for with the currency is a slight dip in the short term. It’s quite usual after this type of pattern breakout that we see prices drift back to that breakout level, in this case circa $0.80. Such an occurrence is of no concern for the bigger picture and indeed offers a level at which to initiate new positions.

The Aussie market is booming like it has never boomed before and the Aussie dollar is the strongest it has been in 17 years.

A gloomy outlook for the Australian housing industry for the rest of the 2007 financial year and for 2007-08.

The number of new dwellings commenced Australia-wide fell four per cent to 150,577 in 2005/06 and industry analyst and forecaster, BIS Shrapnel, predicts a further drop of three per cent to 146,400 in 2006/07.

The firm also says it sees a slight dip in the 2007-08 figure but it will be more of a steadying rather than a lurch downwards.

At 146,000 or so, the number of new dwelling starts is around 30,000 less than considered optimal by the housing industry which says Australia now needs more than 175,000 starts a year to meet demand.

The steadying influence in 2007-08 will come from a recovery in starts in Queensland and NSW which will offset the much forecast downturn in Western Australia.

BIS Shrapnel senior project manager and bulletin author, Mr Jason Anderson, said “We are forecasting that national dwelling commencements will hold steady at 145,800 in 2007/08”.

Business forecaster, BIS Shrapnel believes there will be a three per cent drop in the number of dwelling starts across Australia in 2006-07.

According to the April edition of BIS Shrapnel’s Building Industry Prospects bulletin, the level of underlying demand and the national dwelling stock deficiency indicates a larger number of national dwelling commencements are warranted.

The forecast for 2007-08 isn good news for the property and building materials giants supplying the industry.

The likes of Boral, Brickworks, Hansen, Rinker, Alesco Corp and others will all face additional pressure on margins and sales. They have been battling the depressed state of demand now for the best part of two years, so it could be 18 months to two years more of patchy recovery.

“New South Wales and Queensland dwelling commencements will recover in 2007/08, but the affordability millstone is weighing down demand for new dwellings in Western Australia and we expect that market will experience a downturn in 2007/08,” Anderson said.

With housing affordability set to gradually improve in the eastern states, BIS Shrapnel expects the strength of underlying demand will become the key driver of dwelling commencement activity in 2007/08 and beyond.

In particular, substantial pent-up demand for new dwellings in New South Wales and Queensland should mean these states have the best prospects for expansion, according to the Building Industry Prospects bulletin.

Anderson explains this is due to the higher level of underlying demand for new dwellings, which has received a strong boost from net overseas migration. “Australia’s population gain through overseas migration should reach 140,000 persons in 2006/07, which would be the highest annual inflow since 1988/89.

“More than half of this population gain is from long-term visitors, such as students and people on working visas. Long-term visitors are creating a greater level of demand for rental properties, which is reflected in very tight rental markets nationwide.

“The rising population gain through net overseas migration will help push national underlying demand for new dwellings up to 169,400 per annum over the next five years.”

With rental markets tightening, BIS Shrapnel expects rentals will accelerate, which will eventually attract investors back to residential property.

The recent indications are that investor demand in Queensland is rising, due to the combination of price growth and solid rental yields, following strong average rental growth in 2005 and 2006. Investor demand in New South Wales and Victoria remains weak, however, as rental growth has only begun to accelerate in these states.

BIS Shrapnel doesn’t expect that investor financed construction of dwellings will rebound in New South Wales or Victoria until 2008/09.

BIS Shrapnel believes the outlook for Western Australia, however, is quite different to the current prospects in the eastern states.

The problem of housing affordability spread to the west during 2006 and has begun to hinder demand for new dwellings in that state, according to Anderson. As a result, a downturn in dwelling construction in Western Australia is forecast to develop in 2007 and then deepen in 2008.

New South Wales

BIS Shrapnel forecasts dwelling commencements in New South Wales will drop by nine per cent to 29,150 in 2006/07. This would be the first time the number of commencements has fallen below 30,000 since 1958/59. BIS Shrapnel forecasts a rebound of eight per cent for 2007/08, though believes the New South Wales market will remain fundamentally undersupplied.

Victoria

Dwelling commencements fell in Victoria in 2005/06 and BIS Shrapnel forecasts a similar five per cent decline for 2006/07 followed by a further two per cent decline in 2007/08.

Anderson suspects there was some pull-forward of dwelling commencements into 2005 and 2006, associated with the reduction of the First Home Bonus to $3,000 at the start of 2006.

Last year’s interest rate rises have also dampened investor demand for new dwellings, which has resulted in an extended decline in the number of apartment projects, according to BIS Shrapnel.

Overall, BIS Shrapnel expects demand for new detached houses will remain close to flat in 2006/07 and 2007/08.

Queensland

A solid recovery in dwelling construction is underway in Queensland. BIS Shrapnel forecasts dwelling commencements will rise three per cent in 2006/07 and five per cent in 2007/08.

With a very substantial dwelling stock deficiency and reasonable affordability, Anderson predicts demand for new dwellings will recover first in Queensland.

South Australia

Dwelling commencements should be close to steady in South Australia in 2006/07, according to BIS Shrapnel estimates. In 2007/08, Anderson forecasts an eight per cent decrease in total commencements in that

More speculative strength in the Australian dollar can be expected as it trades well over83 US cents after the US dollar hit a two year low against the euro and the yen.

Gold prices hit their highest level in almost a year in New York on the weekend as oil prices rose, commodity prices remained firm and the US dollar and yen slid.

Yet more highs for the Australian dollar overnight and yesterday after another solid jobs report added to suggestions that interest rates will have to go up, a feeling also boosted by the International Monetary Fund in its annual outlook.

The IMF had a lot to say about oil which received widespread publicity butwhat about the outlook for for non-oil commodities?

According to London-based metals consultancy, GFMS, world gold prices could top last year’s 26 year high of $US730 an ounce within the next year because the now usual litany of factors: the weaker greenback,rising geo-political tensions and an investment-led rally.

Despite three interest rate rises in 2006 plus some major tax changes, investors have returned to the housing market in a big way, according to figures from the Australian Bureau of Statistics.

Barrick Gold is the biggest gold miner in the world and it’s testimony to the controversial idea in business that size can be a hindrance rather than help to share market performance.

Funny how China’s trade surplus in March plunged to ‘only’ $US 6.87 billion from the second highest figure on record reached in February of just over $US23 billion.