Aussie dollar on the backfoot

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The Aussie dollar is sitting at 0.7653 this morning, down around ​​75 points or so from last week’s highs and failure to break above important resistance.

That the Aussie has reversed is as much a reaction to the stronger US dollar – on the cusp of a break higher – as it is to Australia’s terribly disappointing retail sales data for September which was released Friday.

The market had expected a solid 0.4% bounce back from August’s surprise 0.6% decline in retail sales. Instead, we saw a flat result month-on-month with data showing 0.0% growth in retail sales. That result was just the tonic the Aussie dollar bears and those who are worried about household spending retrenchment needed to reinvigorate their argument.

​​Outlook for Australian economy still optimistic

Indeed, I have to say that while I hold an optimistic outlook for the Australian economy, especially while the NAB business survey is still printing such solid results, I am becoming concerned by the signal that this retrenchment we are seeing in retail sales sends about the outlook for the economy.

To recap, I hold a strong view that at some point Australian consumers and Australian households will look around and see the debt pile they have built up, figure it’s time to focus on paying it down and then from that point forward money that would normally go toward consumption will instead be diverted toward paying down debt.

The last National Accounts suggested we weren’t there yet as the savings dropped again to a post GFC low of 4.6%. That suggested households were, are, still happy to save less of their income and consume more.

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But these retail sales suggest that time may be soon approaching. They are weak enough for expectations of the next RBA hike to be moved into 2019 and they are weak enough for the AUD-USD 2 and 10-year bond spreads to contract further in the US dollar’s favour.

Exactly why would a global bond investor buy Aussie bonds right now with these spreads? Only he s/he thought the AUDUSD was about to rally.

This morning the Aussie dollar is on the back foot at 0.7650 as the US dollar is better bid and on a day where we get the latest reweighting by the ABS of the CPI weights which could weigh on both actual inflation, expectations about the outlook, and the Aussie dollar.

That is a risk because the CFTC data shows that the net long position of the big spec accounts hasn’t really shifted over the past week.

What would it take to see a big selloff? It’s hard to know but maybe a break of the low from two Fridays back at 0.7625 might do it.

Looking at the charts there is a strong chance we might see that this week.

I have a sell signal for both my daily and weekly system. A break of Friday’s low, and then certainly a break of the previous Friday’s low would certainly see the sellers emboldened. It would open the way for a run toward 0.7517.

In other forex market news, it hasn’t quite broken out yet but the US dollar, both in DXY and in Euro terms is on the cusp of the start of what could be a powerful third leg of this recovery from recent lows. If the DXY can take out 95.25 then it looks set for a run toward 96.69 and then 97.65. It’s been a hard slog recently and it’s clear in the price action that many traders are still leery of US dollar longs. The similar level for the Euro would be a break below 1.1570.

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A break would be important given position in markets at the moment. CFTC data Friday showed Aussie dollar bulls still haven’t given up. And it showed USD bears and Euro bulls still have significant positions relative to recent history.

Elsewhere as highlighted above, the CAD did very well Friday on the back of the big beat in jobs gains for October. It looks like a deeper pullback in USDCAD is on the cards if 1.27 gives way.

The Kiwi climbed off the mat nicely last week. It’s at 0.6902 this morning and a case for a bounce is building long-term. However, Friday’s dip was a sign that it’s not out of the water yet.

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