Aussie dollar lifts as US dollar falls


The Australian dollar’s recovery and rally from selling fatigue were given a boost overnight by a weaker US dollar which acted as the tide that lifted all boats in the forex ocean.

This morning the Aussie dollar is trading back above 76 cents at 0.7618 for a gain of 0.53% since around this time yesterday. It’s lagged the Kiwi a little bit and marked time with the Canadian dollar’s rise after USDCAD broke through an important trendline. And the Aussie has essentially matched the moves we’ve seen in the Singapore dollar, Korean won, and Mexican peso overnight.

I highlight those moves to illustrate that the Aussie’s rally is very much about the other side of the cross – US dollar weakness.

That weakness came after the minutes of the latest FOMC meeting – which were released at 6 am AEDT this morning – showed a surprising level of disquiet among FOMC members about the outlook for inflation. As a result, even though the minutes also reflected the fact that participants still see the need for another rate hike traders took them to be unexpectedly dovish.

Bond rates rallied at both ends of the curve as a result and the US dollar came under renewed selling pressure.

Not to belabour the point, but what’s important about all of this is that as the other side of the cross a weaker US dollar counterbalances – in this case, more than offsets – all the negatives I’ve been writing about for the Aussie dollar recently. It has a double whammy impact as well for the Aussie on the topside because a weaker USD also often helps lift commodity prices – as it did overnight – which in turn is a further boon to the AUDUSD.

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So we’ve seen a rally. But it’s driven by and conditional on US dollar weakness. But there is every chance that this continues for a few days yet as traders and investors recalibrate their thinking about the path of Fed rates in 2018.

In other forex market moves, the US dollar is weaker across the board this morning having lost 0.7% in DXY terms and against the Euro, having lost about 0.6% against the Pound and having lost 0.1.05% against the Yen and 0.9% Swiss franc. Ostensibly it’s about a bit of a disappointing miss by US durable goods data overnight and the Fed minutes. But it’s just another sign of how the market never really has embraced the US dollar’s recovery from the lows of a month or so ago. That’s a really interesting behavioural tell from traders. It’s something I have seen many times in currency markets over the years and it speaks to the fact that traders believe eventually the ECB and BoJ – in particular – will change policy and follow the Fed higher. Nonetheless, the fact that the US dollar struggles to hang onto good news gets hit on average to bad news, and keeps slipping back is an interesting dynamic for traders and investors to consider.

Looking specifically at the Yen this morning and you can see the utter capitulation of the bears in the past 24 hours. As I highlighted above the prospective movements in policy at the BoJ is a Yen positive while the minutes this morning have added a little more strength to the Yen bid. That’s driven USDJPY down below the 38.2% retracement of the recent rally. 110.88, as the 50% retracement level, is now the next level of support and below that it’s 110.03. USDJPY has been in a broad 108-114 range for most of this year. Perhaps is due for a round turn.

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