Up and down the escalators we go.
That’s the overriding theme for the Aussie dollar and forex markets broadly, at the moment as this period of US dollar indecision seems to have trapped exchange rates within reasonably tight ranges.
In the broad context, it is the fact that the US dollar is still caught that is driving this tooing and froing. It’s caught below important resistance around 95.25 in DXY terms, caught above the breakdown levels in Euro, and it seems also caught below recent, and long-term, range tops in USDJPY.
A lot of it is about the disquiet around where the US tax cut plans are headed. But a big part of it as well is that US 10-year bonds remain well bid and are back at 2.32% well below the recent highs of 2.48%. The narrative around US rates, and thus by implication US spreads versus other nations, remains one which questions the outlook for inflation and thus by implication for Fed rates.
So each time the Aussie heads down to the bottom of the range around 0.7625 it finds a bid.
And because of Australia-specific factors like disquiet over the household outlook and thus domestic growth and the associated fact the RBA has signalled it is not following other central banks in removing monetary accommodation, offers enter the market near 0.7730.
So we have a range.
And unless or until we get a decent catalyst for that to break there will be a lot of elevator commentary – it went up, it went down – around the Aussie.
Medium-term though there is also a battle between the bulls and the bears on the outlook for the Aussie based on global growth.
The bulls say the Aussie has always done well in periods like these where global growth is positively synchronised and pointing higher. That is certainly true. But the bears highlight the risks around the local economy, domestic interest rates, volatile commodity prices, and bond spreads as reasons to sell.
I have sympathy with both sides of that argument. But I do wonder if, given the easier access directly to the USDCNY or USDCNH rates, if the Aussie still plays the global growth bet it once did. Especially when the carry for holding Aussie is so low relative to either China or spread to the US.
Just a thought.
Anyway, looking at the price action the reality is as I noted at the top. The Aussie is trapped in a one cent range against the USD and unless it breaks below 0.7620 or above 0.7733 it’s only going sideways.
That said, while it doesn’t fall it is building a technical case, like the Kiwi, for a break higher and test toward 78 cents.
In other forex market developments, The US dollar is still caught. Caught below important resistance around 95.25 in DXY terms, caught above the breakdown levels in Euro, and it seems also caught below recent, and long-term, range tops in USDJPY.
Looking specifically at the Yen and Kiwi this morning. The Yen seems to be an area where traders are reflecting some of their disquiet over geopolitics and the tax cuts. Although USDJPY has bounced to 113.77 this morning it did trade down to 113.39 overnight. It’s been a wild ride recently and USDJPY has traded up and back in a 150ish range over the past few days. A break either side would be decisive.
Turning to the Kiwi now and it is up sharply since the RBNZ announcement at 7 am. Of course, the bank left rates on hold but the statement read quite bullishly. I tweeted in the immediate period after the release that the statement read like one from a central bank which knows the political pressure is coming but does not wish to cut. I retain that view. But traders, who marked the NZDUSD up 0.9% to 0.6963 a little earlier have backed off a little and the Kiwi is sitting at 0.6946 this morning. Still the strongest of the Commodity bloc, however.
The set up for the Kiwi is looking kind of bullish so the RBNZ’s forecasts for the OCR and growth feed that nicely.
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