(Click on image to enlarge)

Monthly chart

The above chart clearly shows the weakness in the Australian dollar bodes well for the ASX 200. It was only during the post-GFC period that the Australian dollar rally was accompanied by the rally in the stocks. This is because, the strength in the AUD back then was perceived as a sign of recovery from recession.

Since August 2011, the weakness in the AUD has been fuelling the rally in the Australian stocks.

For a major part of 2015, weakness in AUD failed to lift the Australian stocks as oil sell-off and weakness in iron ore and gold prices played a spoil sport.

2017 outlook - The index could test 6K levels

AUD/USD breached 15-1/2 year rising trend line: The AUD/USD breached the rising trend line coming from September 2001 low and Oct 2008 low. Consequently, doors are open for a sell-off to 0.6825 and possibly to 0.62 levels if ‘Trump walks the talk’. Thus, the ASX 200 stands to gain…courtesy of the inverse relationship discussed above.

AUD/USD monthly chart

Bullish break in Iron ore prices: As per technical rules, the long-term trend in iron has turned bullish… as prices witnessed a bullish break from the inverse head and shoulder (bullish reversal) pattern last month. Moreover, prices had been in a downtrend since 2011. The bullish trend reversal in iron ore and other commodities is a plus for AUD as well; however, widening yield differential is likely to keep AUD relatively weak.

Higher rates in US = policy easing in Australia: Policy tightening in US is as good as easing in Australia, given the resulting widening of the yield differential and a weak Australian dollar. More importantly, a (potential) slower rate hike path in US would be positive for global and Australian stocks.

RBA has plenty room for easing: Do not forget that the interest rates in Australia, though at record lows, are still way above the zero lower bound. Thus, there is plenty of room for RBA to cut rates (ease) in case the situation in the economy/global markets takes turn for the worst. Hence, dips are likely to be short-lived and could be bought into.

ASX 200 monthly chart - rising channel

(Click on image to enlarge)

• The index repeatedly found takers under the rising channel support throughout 2016 and finally closed at the highest level in more than a year in December.
• On a larger scheme of things, the index also boasts of a rising channel from 2009 lows.
• Overall, it appears the index is set to test 6000 levels in 2017.

Note: Bullish invalidation is seen only if the index breaks below Dec 2016 low of 5041, while the long-run outlook would turn bullish in case of a break below Feb 2016 low of 4661.6.