The rally in the Australian dollar could be in jeopardy as the US greenback starts to march ahead.
“We saw the Aussie dollar failed just below important resistance at 0.7640 after the US dollar gained some momentum after the US Fed rate decision,” said Greg McKenna, chief market strategist at CFD and FX provider AxiTrader.
The Aussie dollar is trading around the 0.7578 level this morning, roughly where it was this time yesterday.
According to McKenna, technical indicators are showing an ugly possibility of a move down below .75 cents.
“As I mentioned earlier, with commodity prices and interest rate differentials undermining the Aussie dollar, it was only really the US dollar’s weakness that supported the Aussie move up to and through 76 cents,” he said.
However, the solid employment number report yesterday, gave the Aussie dollar some fuel yesterday as it had a strong showing in the Asian session.
The rise of 42,000 was very solid and underpinned by a strong showing in full-time employment.
“But for me, it’s the unemployment rate, which fell to 5.5%, that is structurally the most important for the Aussie dollar over the long run,” McKenna said.
According to McKenna, while the employment data is not always a factor in the Aussie dollar’s moves, “It’s still important in shaping investors and traders’ thoughts around where the economy is at and what the RBA’s policy outlook is or will be.”
He pointed out that in the immediate term “the chance of a sustainable Aussie dollar rally above this week’s highs has been reduced.”
US dollar gains across the board; Asian currencies weaker
This is because the US dollar has gone stronger as the US Fed seems bent on its rate hike trajectory. At the same time, commodity prices are still on the weak side, according to McKenna.
A stronger US dollar, almost across the entire foreign exchange universe, suggests that traders and investors have indeed taken the Fed’s action, words, and projections from yesterday morning’s FOMC decision to have a hawkish bias.
That’s been particularly acutely felt by the Yen which came under heavy selling pressure as USDJPY leapt to 110.88.
The Euro lost around half a percent, Asian currencies were weaker, and it seems like only the pound was able to resist the US dollar surge.
The big mover overnight has been USDJPY which is up 110.88 as traders get ready for the Bank of Japan’s (BOJ) meeting and decision later today.
Japan is recovering. But the data has started to roll over a little recently and the BoJ is unlikely to want to threaten that by changing policy at this juncture.
“So, while I expect them to be positive on the outlook for growth the still low level of CPI inflation should keep them circumspect when it comes to monetary policy. As a result, they are likely to reiterate the 10-year target at 0%,” McKenna said.
That supports USDJPY. But naturally, a large part of that has been pre-empted with the move in the last 24 hours.
“The USDJPY seemed too low at 109 so I expect further strength in USDJP,” he said.
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