The Australian dollar hit a peak of 0.7566 overnight as it continued to enjoy support against the US dollar and other currencies.
“My sense is that the outlook for the Aussie dollar has brightened on the back of consistent support in the mid .73 cents level (versus the US dollar) plus the domestic data which came out not as bad as
some were expecting,” said Greg McKenna, chief market strategist at CFD and FX provider AxiTrader.
However, he said the Aussie’s rally is a bit strange in many ways because at a macro level the fundamental supports seem to be lacking.
“The question is can the Aussie continue to rise against this backdrop where iron ore is weak, bond spreads to the US compressed and the domestic economic outlook clouded,” McKenna pointed out.
Looking at some recent data: Iron ore is languishing again. Australian GDP growth yesterday wasn’t awful. But it was supported by inventory and consumption – both of which may prove ephemeral drivers. And the growth rate of just 1.7% for the year to the end of March is the weakest level since the GFC.
“It’s not the healthiest starting point for the RBA’s increasingly heroic expectation that growth is going to accelerate back toward potential at 3% and beyond,”
“But it was that expectation, and a weaker US dollar which was a big part of the drive higher in the Aussie so far this week,” he said.
At the same time, McKenna said the Aussie has materially underperformed US dollar weakness over the past month and is only just now starting to catch up.
“If you look at it closely, the Aussie has not been able to capitalise on the weak US dollar over the past few sessions. But this really seems to show that it (Aussie dollar) is finally catching up. That’s one of the reasons it’s again making headway on the crosses,” he said.
McKenna also pointed out that based on just the US dollar as an indicator – without the handbrake of Australia’s commodity basket and bond spreads, “The Aussie could be trading as high as 79 cents. But when you add in the hand brakes the Aussie is likely approaching a fairer value in this 0.7550 region right now.”
That means its gains are going to be harder to find unless we see further US dollar selling or a turnaround in base metal prices and or bond spreads.
“That might be a stretch right now. And that suggests a move up to 0.7590/0.7610 might be both achievable short term but a stretch to hold for an extended period for the Aussie,” McKenna said.
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