Aussie dollar lower as commodity currencies weaken

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Another day another elevator ride for the Australian dollar which finds itself back toward the bottom of its recent 1 cent range against the US dollar sitting at 0.7644 this morning.

That fall of 0.6% on the day could have been a little worse given that the overnight low of 0.7628 was just a point or so a​​bove the AUDUSD low experienced just after the strong USD Q3 GDP was released two Friday’s ago.

Nonetheless, it is still a big fall from the high of 77 cents a little after the RBA Governor decided to tilt not in favour of concerns about Australian household spending and consumption but rather in favour of still robust growth forecasts.

“The Bank’s forecasts for growth in the Australian economy are largely unchanged. The central forecast is for GDP growth to pick up and to average around 3 percent over the next few years,” Governor Lowe wrote in his statement.

My sense upon an initial reading of the statement was that this was the primary focus and households were only given a glancing reference.

But as I ruminated over the full statement I was struck that again the RBA Governor had constructed another masterful statement which was both upbeat on the economy but restrained enough to signal that rates in Australia are not going up anytime soon.

In that way, he neatly highlighted the policy divergence between the RBA and the US Fed and in doing so didn’t add to any upward pressure on the AUDUSD rate on his own.

That’s something that other traders must have noted as well because after the foray to 77 cents the Aussie started to drift again.

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And then we had the drift in metals and iron ore as the previous day’s rally started to unwind and then the weaker than expected German industrial production data gave the US dollar a bid tone which hit the Aussie and other commodity bloc currencies.

So, where the Aussie was supported the previous night by the strength of metals and iron ore it seems that the pullback in these sectors and a general weakness in commodity bloc currencies (ZAR lost 1%, MXN is off 0.95% and BRL is down 0.74%) suggests this fall back to the lows of two Friday’s past is part of a broader selloff.

But if the Aussie trades down and through 0.7620 then the next target becomes 0.7515 and then 0.7450. Worth noting a downside break could open the floodgates of positioning.

Chinese trade data today is going to be important.

In other forex market developments, The US dollar really got a wriggle on last night after the weaker than expected German data. But sitting at 94.97 in DXY terms and 1.1576 in EURUSD terms the dollar is yet to break out fully, which is a clear sign traders are noting policy divergence but are still not convinced that is enough to start what I strongly believe will be a strong pulse from the US dollar in the months ahead.

For the moment though this 95.25 region in DXY terms is the level I’m watching to kick the USD higher.

And you’ll read elsewhere this morning that traders are again focussing on policy divergence as a key driver of forex rates. Well, they should I say. But that’s fairly accurate given it was the release of that weaker than expected German data last night which seemed to coincide with the fresh round of US dollar strength. But this is not likely to be a blanket move. USDJPY continues to have significant range top resistance in the 114.50-115.50 region. So, I’m thinking that Euro is a better bet with 1.1500/10 the target and then once that breaks the 1.1275 (200-day moving average) 1.1330 (50% fibo) becomes the main target area.

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For the commodity bloc, it’s a very interesting time at present. Both the Canadian and the New Zealand dollars look to be trying to build a base against the USD (so USDCAD top). But the reversals last night are a warning sign that this process is not over yet and indeed that if the 68 level gives way in the Kiwi or the 1.2970 region in USDCAD we will be in for one heck of a selloff in both these pairs. Those levels have to break first though.

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