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Have no doubt, the Australian economy is now well positioned to continue its 16 year expansion well into its 17th and perhaps 18th successive year, unless we do something really stupid to blow it.

In its own, highly conservative way, the Reserve Bank has indicated there are no real barriers to the expansion continuing: only a wages break out financed or run by profligate companies, governments, or a surge in demand from an out of control Chinese economy, can wreck the expansion.

(The biggest unknown though is what happens if the Chinese economy continues to grow at breakneck pace, with domestic asset booms, over investment and despite more rises in interest rates and reserve deposit ratios? Financial chaos?).

In its second quarterly Monetary Policy Statement, issued on Friday, the RBA explained why interest rates didn’t move last week and laid out a fairly convincing case why there will be no need for a move for at least a year and possibly longer, if things don’t happen out of the blue.

Inflation has fallen faster than the RBA thought in February in its first statement for 2007, economic activity has picked up (as evidenced by stronger retail sales and a tentative rebound in some parts of housing), the terms of trade will decline this year, thanks in part to the stronger Australian dollar, and inflation in 2008 and 2009 is now seen as a bit lower than previously thought.

So all that speculation about interest rates will disappear for a while, although with March retail sales and building approvals out tomorrow (and will be overshadowed by the Federal Budget) and April Labour Force figures on Friday, it will be interesting to read the commentary from the analysts and others.

Normally stronger figures for any or all three sets of stats would be enough to bring the line ‘interest rate rise looms’ out of storage.

But with the RBA fairly firming shoving a rate rise off the agenda for sometime, there will be no mileage in adopting the chicken little approach to economic commentary (rate rise looms!).

These figures and especially retail sales, will be handy updates on how some key sectors in the domestic orientated part of the stockmarket are traveling: the retailers and the building supplies and homebuilders.

David Jones will release its third quarter sales on Wednesday and these will help fill out Tuesday’s ABS numbers in the department store sector.

For those really interested, comparing the outlook commentaries from federal treasurer in the budget papers, and the RBA’s MPS of last Friday will be instructive.

By issuing its statement ahead of the Budget the RBA has quietly asserted its policy dominance and revealed a forecast against which all other forecasts (from treasurer for example) will be compared.

And finally what now for the Australian dollar?

It pushed back over 82 USc on Friday night as the US dollar fell on that mixed economic news but it is now a fair way short of those 17 year highs reached in April of well over 83 USc (and closer to 84 USc).

Once the market had scanned and digested the RBA MPS on Friday the dollar was sold off by around half a cent or so on Friday afternoon and it fell well under 82 USc.

An attempt by Wesfarmers to snatch a greater stake in Coles Group has failed and lifted the potential bid price closer to $18 a share.

Anyone who doesn’t think the Chinese authorities are having trouble controlling the country’s surging economy had better think again.

News of a sluggish first quarter growth rate and renewed Middle East tensions, this time in Saudi Arabia, put some spark into commodity prices after they had been heading for a poor finish to the week.

The US economy is entering probably its most crucial period since the big slump back in 2000-2001.

Situations from Qantas, to Rinker, Alinta and Flight Centre, not to mention Coles, will dominate the market this week in Australia as investors give every sign of wanting to take profits.

The rise of the Australian dollar doesn’t only make foreign travel and imports more attractive, foreign shares, especially ones classified as ‘global’, have become more interesting to some investors.

The Australian uranium industry might be about to join the rest of the resources sector in having a free hand to explore, mine and sell its core mineral if this weekend’s Federal ALP conference votes to lift the party’s bans on any more than three mines.

Not much joy from the latest new home sales figures in the US but Wall Street shrugged off the news to send the major stock market indices sharply higher into record territory.New home sales improved a touch in March compared to the depressed levels of February, but were still way short of being enough to reverse the continuing weakness.The news added to the depressed outlook for the sector after sales of existing homes fell in March, according to figures released a day earlier. (See below)

Now for the Federal Budget in two and a half weeks with no rate rise in the offing and next week’s Reserve Bank board meeting longer relevant.

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.