Aussie dollar adrift as the greenback finds its feet

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It’s been a wild few hours for currency traders this morning with the combination of competing news about the Sterling, a North Korean missil​​e launch and the passage of the US Senate’s tax bill through the committee stage all keeping traders on their toes.

Through this wild ride the Aussie crosses have reacted to the movements in the “other side” but in AUDUSD terms trade has been fairly quiet, although with a downside bias. At 0.7596 this morning the Aussie is hardly weak. But it did trade up to around 0.7619 last night and is not too far from its low around 0.7587. That’s a low that if broken could usher in another wave of selling.

What ails the Aussie is no different to what I have been writing about recently.

The spread between Australian and US government bonds is now negative 2 points and where commodity prices had been supportive of the Aussie dollar last week, the slide this week in metals prices is now a weight. Copper fell 2% overnight amid a generalised sell-off in metals as traders worry about the seriousness of Chinese authorities on reform in the economy and the impact that will have on demand for raw commodities.

Of course, a lot of this is a reversal of the previous extreme bullishness in many metals we saw over recent months. But it is an added weight on the Aussie dollar. So too is the US dollar getting a little of its mojo back – at least against the Euro – after the passage of the Senate’s tax bill out of committee as it progresses to a full Senate vote this week.

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JP Morgan said overnight that if the US tax cuts are passed it could add as much as 5% to US stocks. That would also have a positive effect on the US dollar most likely and interest rates, which may further compound the negatives of the negative spread on the AUDUSD.

RBA

On the positive side the OECD last night entreated the Reserve Bank of Australia (RBA) to raise rates both because the economy – growth and unemployment – can handle it by H2 next year but also to rein in speculative forces in the housing market. Markets are not pricing that at present. But it is fair to say that if the RBA’s forecasts for growth and inflation are right then there will be a refocus on the path of interest rates in Australia.

But that is likely for another month, perhaps a quarter, and is no support for the Aussie at the moment.

Of course, a strong rise in Q3 CapEx when it is released tomorrow could assuage many fears about the economic outlook. Indeed, I think it might. But I’m not one to “punt” number – so we’ll have to wait and see.

In other forex news, the British Pound (GBP) is the big story overnight. It was lower initially over concerns about the Brexit negotiations, stories that the EU had given the UK a deadline of next week, and concerns about how the issue of a “hard” border between Northern Ireland and the Republic of Ireland could be resolved. So, the Pound and GBP crosses have had a wild ride with bearishness giving way to bullishness on the Telegraph story.

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So, it’s been a wild ride for the Pound and it probably stays bid now unless or until bad news on Brexit hits the airwaves. A break above 1.3390/1.34 would really kick things off. It’s at 1.3364 after the US tax bill.

Euro

Euro is lower as a result of selling via the EURGBP cross and the fact that in and of itself the charts suggested that EURUSD was likely to drift back to and likely through the 1.1860 level. 1.1805 is the 38.2% retracement level of the recent rally from the mid 1.15’s and is the likely first target – it’s at 1.1843 presently.

Yen

The Yen remains at or around 111.00/50 while for the commodity bloc it has been a challenging night. The Canadian dollar is higher as the BoC released its financial stability review and governor Poloz appeared to wax a little dovish noting that the bank had to wait and see how its recent rate hikes effected policy. USDCAD is up 0.35% and testing resistance at 1.2811.

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