Aussie dollar lower as US dollar surges

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After climbing to a high of 0.7718 yesterday the Australian dollar is lower again this morning sitting at 0.7661, down around 0.6%, after breaking below both trendline support and the 200-day moving average over the past 24 hours.

A large part of the selling over the past 24 ​​hours has been the US dollar’s surge after the dovish tilt taken by Mario Draghi and the ECB overnight. That move has seen significant levels in the USD index and Euro break. And that, in turn, changes the narrative around the US dollar and its outlook.

That naturally puts downward pressure on the Aussie dollar.

But so do does the fall itself.

I say that because many commentators, forecasters, and strategists fought the AUDUSD rally saying that it was above or at the upper edges of fair value. That didn’t stop prices rallying of course – that’s not what these models are about. But they do highlight the risks to the Aussie if key drivers start to move against it.

Already this week I’ve noted that the elevated level of positioning makes the AUDUSD extremely vulnerable to a capitulation. That risk has risen materially now that the Aussie has fallen down and through the 200-day moving average.

And of course, with the outlook for the US dollar looking vastly improved, and with the Australian-US bond spread moving in the US dollar’s favour the risks grow that the Aussie won’t stop here at 0.7650.

Now, I’m naturally reticent to get too bearish when the Aussie has simply fallen back to one of the levels – 0.7650/60 – I’d highlighted over recent weeks. But it’s worth noting that besides the BoE a number of the globes central banks have gone out of their way to contrast their outlook with that of the US Federal Reserve’s tightening and tapering path.

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​​Dovish ECB sends Euro lower vs USD

Just this week we had the Bank of Canada wax dovish and last night Mario Draghi did the same. Australia’s CPI report for Q3 this week did the same for the RBA – I’d argue Guy Debelle’s speech last night reinforced that notion rates are on hold. The Kiwi is down in no small part because the focus on an employment piece in the mandate suggests a more dovish stance. And of course, the BoJ retains its uber-dovish bond buying stance.

Policy divergence folks. It’s back and it matters.

So for Australia with questions about the outlook for Australian households, where there is slack in the labour market still, and where wages growth remains weak, the outlook is for an RBA to remain on hold for some time and differentials to move in the Fed’s, and US dollar’s favour.

In other forex news, Perhaps it’s a bull market for the US dollar now. By signalling a clear policy divergence between the ECB and the Fed Mario Draghi has sought to break the nexus between recovering global growth, and in particular EU growth, and an associated convergence in central bank policy. In the same way that the RBA has recently said it won’t be influenced by what other central banks are doing right now, and in the same way as BoJ governor Kuroda has set a different path for monetary policy in Japan, Draghi masterfully highlighted that the ECB is not the Fed. He also highlighted that he, Peter Praet, and Vito Constancio – the DOVES – are in control and the voices to listen to at the ECB.

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So as I highlighted above the Euro was pole axed and the US dollar has broken up and through resistance in DXY terms at 94.25. The targets for both are now 1.1500/20 and 95.50/90. Don’t rule out 1.13 or 1.1150 as targets for the Euro either. We’ll see how it looks at 1.15 first though.

Looking at the commodity bloc its weakness across the board. The Kiwi, caught in a perfect storm of US dollar strength and concerns on the outlook for the RBNZ and the economy, has fared worst with a loss of 0.77% to 0.6836. It’s just 20 points above the year’s low. A break could see a move toward 0.6500/50 as discussed earlier this week. The CAD is under pressure as well now that the BoC has also taken a dovish bent this week itself highlighting policy divergence with the Fed. USDCAD is at 1.2850 up 0.43%.

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