Aussie dollar just above 2-year trendline as sharks circle

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A stronger US dollar has combined with the disappointment of this week’s weaker than forecast GDP and the big miss of yesterday’s trade surplus to push the Aussie dollar sharply lower in the past 24 hours.

At 0.7506 this morning the Aussie is down 0.71% against the US dollar and just 20 points or so above a trendline which stretches back to the January 2016 lows in the mid 68 cent region. That’s an important trendline which traders will be watching closely. And one that if broken would signal a much deeper move for the AUDUSD and on the crosses.

The drivers of the recent weakness are pretty straightforward.

Disappointment at the failed run to 7650 is one of the factors certainly. The Aussie broke up through and closed above the downtrend from the 81-cent region last Friday. But this week’s price action has proved that a failed break.

Likewise, while the Aussie’s price action has been disappointing – and shows the bears still in control – the data has also been underwhelming. Indeed, the washup of the GDP release and the trade data yesterday ($108 million surplus against expectations of a more than $1.3 billion outcome) has been that the Citibank economic surprise index has dropped back to -40.1. It was at -26.6 last Friday.

Now clearly the Aussie – or any currency – is more than just the data. But that fall to -40.1 means this index has just had its weakest print since December 2016 when the AUDUSD was in the 72/73 cent range.

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That’s important because as I wrote earlier this week it is up to the data to support the RBA’s view on the outlook for growth and thus change perceptions about the outlook for the economy and rates. At -40.1 clearly the data has not done that.

So when you throw in a technical failure, a stronger US dollar, collapsing iron ore prices, generalised metals market weakness, and a 2 year spread in negative territory you can see why the bears have the upper hand and the sharks are circling.

It’s a very different Friday today than the last one where the Aussies prospects look on the improve.

A break would open up the way to 0.7450 and ultimately the move I highlighted some time back when I said the Aussie might do a Kiwi and make a full round trip to the start of the rally to 81 cents which would imply a move into the mid 73 cent region.

It looks a little overdone at the moment and with support so close, well…maybe. But I’ll worry about topside when the knife stops falling.

In other forex market movements, the US dollar continues to strengthen as we head toward next week’s FOMC meeting. The focus is not going to be on the long-anticipated December rate hike but rather what the Fed suggests for the outlook on rates in 2018 and beyond. There is also a focus on what the Fed will say about the impact of tax cuts on the economy. So, the US dollar has caught a bid and Euro continues to look biased down toward 1.17. That’s the 61.8% retracement level of the recent run-up near 1.20.

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Sterling bounced of that trendline last night as support came back into the market after hints that a deal is actually close on the Irish border issue. It’s not confirmed yet but there is enough positivity in forex markets that traders are prepared to bet – and thus respect the trendline – that a deal will be done. That creates an important volatility point for the Pound if a deal is not done. As I wrote earlier this week – GBPUSD could fall 100 points (done) and if ti does it could fall another 200 more. Support has held for the moment.

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