The Australian dollar is back above 80 cents this morning at 0.8008 after gaining some momentum yesterday.
“That’s a solid performance given the big falls we saw in Chinese iron ore futures yesterday,” said Greg McKenna, chief market strategist at CFD and FX provider AxiTrader.
“The tractor beam of 80 cents has caught the Aussie dollar once more,” he added.
According to McKenna, while iron ore prices, metals, and commodities more broadly are important inputs into Aussie dollar moves, what happens to the US dollar is also a factor to the Aussie’s moves.
“My view is that the US dollar is the underappreciated side of the AUDUSD cross,” McKenna said.
“If you look at all the factors affecting the Aussie dollar this year, it’s clear that it is the US dollar’s fall which has the major directional influence,” he added.
That’s not to say other factors are not important. It’s simply a recognition that like many other USD pairs across the globe – except maybe the Euro and Sterling (quite recently) – it’s the move in the US dollar which has been the primary driver.
US dollar weakness Aussie dollar’s strength
He mentioned that even the Reserve Bank of Australia (RBA) has recognised the broad depreciation of the US dollar as one of the factors for the Aussie’s strength this year.
But that fact is a complicating factor for the economic recoveries both here and across the globe as the weakness in the US dollar makes other nations effectively less competitive vis-a-vis the United States, McKenna noted.
In the meantime, he also pointed out that tonight’s announcement of the US Fed’s balance sheet taper plans and Janet Yellen’s press conference will be important for forex markets in general and the Aussie dollar in particular.
“If we see a dovish outcome as the last batch of Fed speakers we heard from before the pre-meeting blackout period, then the US dollar could be crushed and the Aussie will be back near, perhaps above, 81 cents and its multi-year highs,” McKenna said.
He added, “I believe the Fed is continuing on a normalisation path. And while I see the taper as having equivalence to a tightening in rates due to its eventual impact on bond rates, I still believe the US economy justifies higher rates this December and again in 2018.”
From McKenna’s perspective whether or not the US Fed communicates that tonight, whether the market reads it that way, or whether traders grapple for the dovish message will be instructive to whether or not the next leg of US dollar weakness is about to begin.
“Conversely, we could see a signal that this truly is a bottoming in the dollar,” he noted.
At the same time, today’s speech from RBA’s assistant governor Luci Ellis could be a market mover, McKenna said.
From a technical perspective, the Aussie found support at a high of 0.8019 overnight.
“That’s short-term resistance and then the 0.8035 region which was the high on the previous two days before yesterday is the level to watch,” McKenna said.
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