Aussie dollar back from the brink but still under pressure

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The Australian dollar was back from the brink on Friday night as the US dollar gave up the ghost just as it had pushe​​d through resistance in DXY terms and as it had the Euro under attack and on the cusp of a break through the all-important 1.1660 level.

That it backed off so swiftly was as much a testament to traders’ Friday fears of closing at a high, or low in the case of the Euro, as it was about concerns of another North Korean missile test.

But the reality is in this current market that where goes the US dollar so goes the Aussie.

So, having made a low around 0.7732 the Aussie recovered to end the week down, but off the mat, at 0.7769. It’s still under pressure as traders wonder if finally after years of hand-wringing over the outlook for the Australian economy their worst fears about the outlook are suddenly about to be realised.

As I wrote last week, I myself have found optimism usually triumphs. So I’m not going to become to hand-wringy just yet. Least not until I see a deterioration in the NAB business survey and the Australian employment market.

We get the NAB survey this week, along with the Westpac consumer sentiment survey, but we have to wait until the 19th for the local jobs data.

But what I wanted to focus on this morning is something that is unlikely to actually happen to the Australian dollar. That thing is the expectations of forecasters for the outlook for the Aussie dollar over the next 3, 6 and 9 months.

Over the weekend it was reported that a “survey of 50 analysts predicted the Australian dollar would be at $0.7800 in three, six- and 12-months ahead, barely changed from present levels”.

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That in a world where the Australian economy is finally looking a little fragile, when the Fed is raising rates, and tapering its balance sheet, where the ECB is fighting not to tighten even as its economy says it should, and as the possibility of a post-19th National Conference crackdown on the speculative elements of the Chinese economy slows growth in the world’s second-biggest economy the Aussie dollar will just sit around 78 cents for the next 12 months.

Maybe we are entering an era of low volatility where all the competing forces cancel each other out. But I just don’t buy it.

Since 1971 the average range for the AUDUSD has been 13.596 cents per annum. Since the float in 1983 it has been 14 cents, and over the last 20 years, the AUDUSD range has been 15.332 cents.

The last 5 years have seen an average range of 13.15 cents. And sure the last 2 years have been quieter. But the Aussie has still traded through 9.64 cents this year and 10.11 cents in 2016.

So, I don’t buy it. There is little chance the Aussie will be 78 cents over a 3,6 and12 month horizon.

Now we have a range. That’s something that might actually be right – at least over the next 12 months.

The weekly AUDUSD chart suggests further downside – perhaps even under 74 cents is on the cards. And while the daily chart had a decent bounce the overall downtrend remains intact.

The AUDUSD would need to break 0.7835/40 to change this outlook.

The US dollar finished off its high Friday night in price action that may suggest to many traders the first leg of this USD move is over and resistance has held. Given the failure to hold above 94.15 in DXY terms or punch below 1.1660 that would be a reasonable assertion on the face of it. Indeed, last Monday I received a raft of US dollar buy signals from my weekly system. They were second tier buys which require a lower amount at risk on the trade and thus a smaller position. But most were triggered in the 5 days till Friday. It’s been a long time since my system generated a US dollar buy. So even if it retraces some of last week’s gains in the week ahead I remain cautiously bullish the US dollar. Both technically and because the economy is clearly doing well, the jobs market is tightening, and that wages jump suggests that maybe the delayed reaction to this tightness in higher wages has begun. At the very least, amid a messy release, it will give the hawks at the Fed something to worry about for the first time in years.

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But let’s face it, the key here for the dollar is Euro and its ability to hold above the 1.1660/80 region I’ve been highlighting for some time now. The ECB has – mostly – been at pains to stress that even when it decides to withdraw monetary accommodation by reducing its bond-buying – QE – program that rates will stay low and policy stimulatory because inflation is quiet. The trouble of course for central banks right now is that the re-emergence of economic growth synchronicity has seen European data lift with the US and other jurisdictions. So, if traders know – believe at least – that a December hike is locked and loaded at the Fed then this is priced in. That means the ECB has more work to do to dissuade traders it really is serious about leaving policy accommodative so as to be sure the Euro doesn’t strengthen too far.

We’ll be able to judge the efficacy of their battle for a weaker Euro by whether this 1.1660 level remains supported or rather, as would be my base case, breaks and EURUSD heads to 1.1500/25. Mario Draghi has two opportunities to send this message before the ECB next decides interest rates on October 26. He speaks this week and then again on the 23rd.

Looking elsewhere in the Currency space and USDJPY has had another ugly failure above 113. That’s two weeks in which every foray has been chased back. Naturally, a little risk aversion helps the Yen. But the reversal from Friday’s high of 113.42 to close at 112.63 is an ugly one. USDJPY still looks like it’s topping and I now have a sell order from my system.

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Looking at the commodity bloc we see the Aussie and Kiwi remain under pressure. Off their lows certainly but under pressure nonetheless. The Kiwi closed the week below its 200-day moving average for the first time since June which is a bearish signal. An eventual move below 70 cents looks on the cards. NZDUSD finished the week at 0.7092. The CAD was pressured early with USDCAD above 1.26 at one point but it closed at 1.2525 after a big reversal.

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