Aussie dollar gets boost from weak USD and iron ore recovery

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The Australian dollar is up half a percent this morning at 0.7713 after a combination of better than expected data yesterday but mostly a weaker US dollar saw it rally to an overnight high of 0.7729.

That’s right in the resistance 0.7725/30 resistance zone which was previously support for the Aussie on the way down to last week’s low at 0.7625. And it sets up a tantalising chance for a big move upon the release of Australia’s September retail sales data at 11.30 AM AEDT this morning.

After a horror, 0.6% fall during August forecasters are expecting retail sales to have bounced back 0.4% in September. While a bigger number would be needed to get the Aussie moving higher on the day even a 0.4% is really necessary to put to bed the deep concerns many economists have about the outlook for Australian households and consumption.

Conversely, a weak number would be a shock and the Aussie would reverse reasonable quickly.

Looking at the drivers of the Aussie at the moment we’ve seen some recovery in iron ore prices, while metals have rocketed higher in the past few days. That’s been supportive. But so too has the US dollar’s little reversal with Euro back up here at 1.1660.
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It’s clear that the Euro bulls won’t give up just yet and that is helping other pairs – like the Kiwi, CAD, and Yen – hold important levels and thus keep the overall US dollar move from busting wide open.

That, in turn, has helped the Aussie dollar at the margin, as well.

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But just look at the Aussie 2 and 10-year spreads against the US rates. We have both at multi-year lows. That’s important because those investors who want to buy Aussie bonds need an incentive to buy them. And at 18 and 25 points over their US counterparts respectively the pickup Australian government bonds offer is only wafer thin.

That’s something to think about. And it is something that global investors can hardly ignore. And it is thus a downward force on the AUDUSD exchange rate.

But for the moment the charts suggest that if AUDUSD can rise above 0.7733 we could see a run higher. Yet there is also resistance between that level and the top of the current downtrend channel at 0.7795.

In other forex developments, this is not a bull market for the US dollar. That much is clear as traders react to shocks that are dollar supportive but use every excuse to sell the dollar they can find. It’s an interesting behavioural bent and one I have seen many times in asset markets over my career. There was even a study of this type of bias year back when the Euro first was launched and kept falling for a time. Anyway, at present we consistently and constantly see folks questioning the outlook for the economy, for the Fed, its governor, and now for tax cuts and productivity in the US. In behavioural terms, this is classic wave one and wave two of a move in an asset. What night change this desire to not believe in the US, the dollar, the Fed, and I think its president? I’m not sure. But it is clear for the moment that once the initial spurts of US dollar buying exit the market, traders are happy to buy Euros again and that is helping other pairs resist the US dollar’s moves.

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So this morning not a lot has changed from yesterday for the Euro or Yen. The Euro is still trying to break up sustainably back through the previous support zone at 1.1660/70 while the USDJPY is still caught below the recent 114.45 high which is also the inner top of the 2017 range. A break would be important and open a run to the high at 115.50.
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British Pound collapsed as Bank of England raised rates

GBP collapsed after the dovish hike from the BoE. But it did find support at the uptrend from the February low for GBPUSD. Kind of anyway and the 1.3020/30 region – October low – is now the one to watch.

The dollar bloc is rallying back from oversold levels with the Kiwi up at 0.6911 and the CAD back at 1.28. These are significant reversals off very important levels and could have legs.

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