AUD/USD Intermarket: Will iron ore rally strengthen AUD & ASX 200?

The close correlation between the Aussie dollar and Iron ore prices is well known fact.

Both have been moving hand-in-hand since 2011. The metal topped out around $187 per tonne in Feb 2011. During the same time, the AUD/USD topped out around 1.10 handle. The direct correlation has been strong since August 2015.

Inverse head and shoulder breakout on Iron ore

Iron ore bottomed out at $38.03 in Dec 2015 and has witnessed an inverse head and shoulder breakout in late October. The AUD/USD bottomed out at 0.6835 as well. The metal is trading around $80 per tonne today, however the AUD is falling behind, mainly due to heightened Fed rate hike odds.

Nevertheless, strong correlation suggests the AUD could be heading higher in the wake of inverse head and shoulder breakout on iron ore.

However, the S&P/ASX 200 could lag if the AUD outperforms Iron ore in 2017. A combination of iron ore rally and a relatively weak AUD would do well for the Aussie stock market. On the other hand, stock market may underperform if the AUD spikes (on delay in Fed rate hike).