The Aussie dollar is higher this morning after the continued rally in metals, copper, in particular, positivity in stock markets, and a surge in the Canadian dollar all gave it the strength to break up and through the 200-day moving average which had constrained its rally for the past five days.
Clearly at 0.7703 this morning, it’s not exactly a big break. But the AUDUSD is near the high for the past 14 hours at 0.7705 and I am now targeting the 38.2% retracement of the fall from just above 81 cents to the recent lows – that level is 0.7730/31.
With metals doing so well, with mining and metals shares doing so well relative to the market, and with China signalling it will go for growth rather than aggressive economic restructure, the Aussie can benefit from a weaker US dollar and positive sentiment. And of course, now that the 200-day moving average at 0.7592 has been bested some traders will also take that as a bullish indication.
Of course, in the first instance, the Aussie’s rally off 75 cents a week or so back is a reaction to the fast fall. But all of the factors cited above – especially this renewed positivity to the outlook for what are the key historical drivers of Aussie dollar strength – global growth, metals and the performance of assets which reflect this – has seen sentiment toward the AUDUSD improve.
That’s not to say the interest rate differential is suddenly no longer relevant. That’s certainly not the case. But as these other markets have improved so too has the AU-US 2-year bond spread which has managed to get back in the black and sits at 9.5 points as I write.
Yes, it’s still nine-tenths of not very much. And there is still little incentive for international bond traders to buy Aussie bonds. Unless that is they are more positive on what might be the usual drivers of AUD strength and can see a capital gain on their bonds in that regard.
And it is through this channel that I’m more positive than most into 2018 for the Aussie. It doesn’t mean it can’t dip. But my sense is the preconditions are for a test back to the 2017 highs at some point.
In other forex market developments, things are pretty quiet at the moment for the majors. The move in the Canadian dollar last night, however, does signal what ails the USD. The growth outlook across the globe means the US has been joined by the rest of the world and as such other central banks are tightening along with the Fed and will continue to do so. And it’s this policy convergence – even though many are at different stages in the cycle – which is holding the US dollar back from the gains that would normally be associated with front-end or long bond spreads. My sense is that can change in 2018. But for the moment, traders are reacting to immediate stimuli which is why the Canadian dollar rallied so hard (USDCAD lower) against the USD overnight. It’s still the recent box. But the chance of a break lower has risen.
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