Aussie dollar on strong footing​


If the Aussie dollar is going to break higher, it has built a solid base in which to do it after yesterday’s release of September employment again showed the economy is mapping in the direction of the RBA’s forecasts, not the doomsayers fears.

So this morning the AUDUSD is up 0.45% to 0.7878.

The Aussie dollar looks strong and if 79 breaks, it could trade to 0.8050

It didn’t quite make the 79 cents level as the fall in iron ore and metals prices together with the Solid but not expectation-beating Chinese data dump yesterday constrained the upside. But it has been a solid 24 hours for the Aussie nonetheless.

A large part of that is because after the shock of the 0.6% fall in August retail sales – released earlier this month – it was up to the NAB business survey, consumer sentiment, and employment to disprove the narrative that Australian consumers are retrenching. We are now 3 for three for the alternative hypothesis that the economy is on a solid footing after yesterday’s employment beat expectations with a 19,800 increase and an unemployment rate of 5.5%.

If I just use my crude and very long-term directional indicator of Australia’s unemployment rate (inverted) and the Australian dollar then prices above 80 cents are consistent with current settings.

Of course, no currency – especially the Aussie dollar is a one-factor model. But this relationship simply highlights that the unemployment rate is often a neat shortcut for where the economy sits.

And to that end, the outlook for the USD, investor sentiment, bond spreads, Chinese and global growth – among other indicators – are important for the Aussie dollar’s outlook.


A quick look at that list – save the Aussie-US 2-year spread – are very supportive for the Aussie.

For the moment though it remains the case that the AUDUSD needs to break up and through 79 cents, 0.7930 to kick higher. But as you can see in the daily chart that break has increased in possibility given the base building and then rally of the last 3 days.
Kiwi slides as new government forms in NZ

An awful past 24 hours for the New Zealand dollar after Winston Peters’ New Zealand First party decided to form a coalition with the second place Labour Party and the Greens to form government. That makes Jacinta Arden the next prime minister of New Zealand and saw the Kiwi collapse close to 2%, around 1.4 cents, against the US dollar to 0.7013. Against the Aussie dollar, the Kiwi has lost around 2.2% as the rate surged to 1.1208.

The Kiwi had already been on the back foot due to the uncertainty surrounding the formation of the next government after the recent election failed to deliver a majority to either of the main parties. And what’s hurt the Kiwi against the US dollar and on the crosses is the uncertainty that the new government brings. After a decade of National Party rule, the change to Labour was always going to increase uncertainty. But when Arden says things like she wants to lead an “active government” and that “We won’t just allow the economy to be carried by housing price inflation and population growth” traders wonder exactly what that means. It’s not a vote of no-confidence in the new government per se. But traders hate uncertainty which is what the New Zealand First decision has delivered. So, they act accordingly and sell. Support, or the target for the fall, is 0.6968. But a full round trip to the start of the NZD’s rally at 0.6817 is not out of the question.

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Elsewhere in forex markets, it’s again clear that for the US dollar to push higher the market needs to see something more than simple confirmation that the Fed will be hiking in December. With jobless claims again hitting lows not seen since the 1970’s it’s pretty clear that the labour market remains tight and the Fed’s concerns on the eventual impact on wages will remain elevated. But USD strength faded quickly and the Euro is up 0.36% at 1.1828. It seems that for the moment the good news for the US dollar is baked into the cake and traders don’t want to sell Euro sustainably before next week’s ECB meeting.

The DXY has clear parametersthat are currently constraining it. Why the US dollar is so weak relative to Euro when the Fed is hiking and the ECB on tapering its bond buying is fundamentally hard to fathom. But behaviourally the answer I think is that traders are still adjusting to the reality that EU data has been so much better than expected over recent months (the EU version of Citi Eco surprise index is at 68.5 against the US version’s 1.8) and the fact that the US has disappointed and we all know the Fed thinks it will be tightening. Traders aren’t convinced though as the 10-year at 2.32% and 2 year at 1.55% suggest.

Euro needs to take out 1.1880/1.1900 to break higher and negate the downside bias – and the head and shoulders some are watching. The Pound came under pressure from the weak retail sales data and Cunliffe’s dovish comments. And the Yen strengthened a little as the USD backed off the top of the recent range in USDJPY.

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