In the context of the stronger US dollar to kick off the week the Aussie’s tiny 0.1% fall to 0.7826 this morning is a solid days work. What’s more impressive is that the Aussie traded down to a low around 0.7794/96 where it found solid support before bouncing back to the current levels.
In no small part, the Aussie dollar is supported by what is increasingly looking like a very positive global growth backdrop. The raft of manufacturing PMI’s to kick off the week was on balance extremely positive.
That’s positive for the Aussie dollar in a number of ways.
It should be positive for commodity prices and it should be positive for investor risk appetite. That, in turn, should be positive for the Aussie dollar. But the key to the near-term outlook is that while this backdrop is supportive of the Aussie dollar the reality is the run above 81 cents was driven by the weaker US dollar.
And it is the US dollar’s outlook that is likely to dominate in the period ahead.
To that end, it is worth noting that at 93.62 the USD Index is close to a break higher which could see it run to 95.85/96.00 as the Euro comes under a little pressure from the questions the Catalonian referendum raises and the USD is supported by the improving data flow we finally see traders take note of.
That potential 2% rally, if replicated in an AUDUSD fall would suggest a move toward 0.7650/70 – which just happens to be the target zone technically I’ve been talking about.
Before we get there though – or perhaps helping the Aussie a little lower – the RBA board decision and governor’s statement will be released at 2.30pm this afternoon.
While no one expects rates to move what governor Lowe says in the accompanying statement will be parsed aggressively by both sides of the interest rate argument for signs of whether the inclination is moving toward rate hikes or rather if the RBA is firmly stuck on hold.
Based on recent comments hold seems the more likely outcome with continued caution around employment slack, lowflation, subdued wages growth, a relatively strong Aussie dollar, and high household debt. But as the global manufacturing data shows – the backdrop for the Australian economy has improved. So on the current trajectory, the move to higher rates in Australia is only a matter of time. When not if.
For the moment though the Aussie US bond spread has compressed because traders think the fed will move harder and faster than the RBA. That’s a AUDUSD negative and if governor Lowe reinforces this recent contraction that will increase pressure on the AUDUSD.
The daily charts show the Aussie made a marginal new low yesterday around 0.7794. That questions the notion that the AUDUSD might be mapping out a range bottom here. But only marginally as this low was but 5 points lower than the low last week.
So the jury is still out on that. The Aussie would need to rise above 0.7865/70 to confirm that idea. In the meantime, the trend toward Fibonacci support at 0.7750 and then 0.7660 looks intact.
In other currency news, the US Dollar was generally better bid as traders worried about what Catalonia means for Europe and the Euro. Last night’s data reinforced that move and we saw something we haven’t seen since late April this year – the Citibank economic surprise index for the US actually climbed back into positive territory. So this morning the USD index is on the cusp of a break, Euro is at 1.1735, the pound is at 1.3273, USDJPY at 112.74 and the Aussie dollar is largely unchanged at 0.7825 after again finding solid support under 78 cents.
This morning the Euro is down 0.67% at 1.1734. Last night’s low was 1.1724 which is just above the previous week’s double low on consecutive days around 1.1715/20. That makes this zone a critical region which if broken will open up the downside to 1.1660/80. A break of this latter level would potentially be a sentiment changer. MY current target remains 1.1525 however – just a garden variety 38.2% retracement level of the big swing to recent highs.
USDJPY is higher, up 0.24% at 112.74, actually looks a little toppy. Yesterday’s Tankan survey – like the other data I discussed above – was actually pretty solid and levels above 113 are looking a little tough for the bulls to crack at the moment. Only a break of 112.15/20, however, would suggest a big fall.
The Sterling was the worst performer among the G10 with a fall of 0.93% to 1.3273 after the worse than expected PMI print overnight.
Of the commodity bloc, the Canadian dollar lost 0.34% with USDCAD up at 1.2508 as oil prices slid overnight. The Kiwi is at 0.7194, down 0.15% while the Aussie dollar is down 0.09% at 0.7826.
As noted above the global and local economic backdrops are supportive of the Australian dollar which helps explain why it found support below 78 cents again over the past 24 hours. Ultimately the question for the bulls is whether that outlook can countermand what looks like a resurgent US dollar. Data on both sides of the pair will determine that in the weeks ahead.
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