The Australian dollar failed to stay above the .74 cents level over the weekend and is still feeling under pressure.
“Since we saw the Aussie dollar’s collapse early this month, the .7420 region has been the kill zone for the bulls,” said Greg McKenna, chief market strategist at CFD and FX provider AxiTrader.
He added, “This means the Aussie has been throttled at this level (.74 cents) on four occasions now in the past seven trading days.”
According to McKenna, the Aussie is going through the same pressure as other commodity currencies like the Canadian (CAD) and New Zealand dollar (NZD)
“The pressure has resulted from weakness in both the prices and the outlook for commodity prices as traders and investors recalibrate their expectations for Chinese growth,” McKenna said.
Recently the People’s Bank of China (PBOC) has on a number of occasions, declined to provide liquidity at the short end of the curve which has tightened liquidity and driven Chinese interest rates higher.
“That’s been an important factor in the rout in iron ore and other commodity prices,” McKenna noted.
He added that clearly, the relationship between tightening liquidity, rising Chinese interest rates, and the fall in iron ore extends to a relationship with the fall in the Australian dollar recently.
According to McKenna, “Investors are betting that as China tightens it is signalling a crackdown on the more speculative areas of the economy,”
“They include some of the punters who were instrumental in driving commodity prices higher,” he said.
However, a more important signal many see is that China, having locked down its capital account, is actually going after the more speculative areas of the economy including production and investment, as it seeks to transition toward a more consumer and service based economy.
“Some support to that view appears to have been given by PBOC money market actions Friday. The bank declined to inject short-term cash rather offering medium-term money,” McKenna said.
The markets will be eyeing the release today of Chinese retail sales, industrial production, and urban investment data for March, which will be an important driver of the Aussie and other commodity currencies.
“This data will tell us if the Aussie is going to challenge once more the 0.7420/30 region or again head back lower,” McKenna said.
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