Bull flag breakout in Copper, AUD still stuck in descending channel

Copper is well bid this Friday. The red metal is trading at $3.16 and has gained  3.27 percent since Nov. 16. Meanwhile, the three-day winning streak in AUD came to a halt today at 0.7633 (61.8% Fib R of May low-Sep high).

Copper daily chart

The above chart shows-

• A bull flag breakout could be confirmed today if prices close above $3.14. Such a move would open doors for a re-test of the recent high of $3.25.
• Momentum studies: 5-MA, 10-MA, 50-Ma, 100-MA & 200-MA are curled up in favor of the bulls. The RSI is bullish and trending.

Weekly chart

On the chart above, we see-

• Inverse head and shoulders breakout.
• Breach of the 5-year long downtrend line.
• Nice rising bottom formation.
• 5-MA and 10-MA carry positive bias.
• RSI is bullish.

View on Copper - Looks set to revisit the recent highs around $3.25. A violation there could yield $3.42 (Dec. 2013 high).

Copper is one of Australia's top exports. Thus, a bullish outlook for copper should mean good times lie ahead for the AUD... not necessary as there are a number of other factors that determine the exchange rate. So, it is advisable to take into account the correlation between copper prices and the AUD/USD pair.

The one-month correlation coefficient between the AUD/USD and Copper is 0.51, while one week correlation coefficient is 0.86. A correlation coefficient of +1 indicates a perfect positive correlation, while a correlation coefficient of -1 indicates a perfect negative correlation.

Given the one week correlation is strong (0.86), AUD is more likely to take out the falling channel in response to higher copper prices.

AUD/USD daily chart

The above chart shows-

• The pair is chipping away at the falling channel hurdle. An end of the day close above 0.7627 would confirm a bullish break of the falling channel and shall open doors for 0.7733 (Oct. 6 low).
• Let us assume the tight positive correlation between copper and AUD stays intact, copper sees a bullish flag breakout and rallies to $3.25-$3.30 and other things remain unchanged. In such a case, AUD/USD could rally to 0.7855 levels.
• Given the strong bearish bias of the downward sloping 50-day Ma, a move to 0.7855 looks unlikely, although a 100-pip rally from the current level of 0.7620 seems likely in the short-run.