The Aussie dollar pulled back 75 pips from the intraday high on Friday as metal prices collapsed.
“The Australian dollar is sitting at 0.8048 after it ran to a high around 0.8124 Friday. That was the highest-level Aussie dollar had traded at since an aborted foray above 81 cents on May 14 2015,” said Greg McKenna, chief market strategist at FX and CFD provider AxiTrader in Sydney.
“It’s left the Aussie dollar chart with an ugly pin bar reversal which could be a signal for a top – at least for this run – after an equally ugly reversal in metals saw sentiment toward the Aussie dollar sour.”
The Aussie dollar has had a perfect storm recently with rising commodity prices, a weakening US dollar and a strong set of economic data.
Greg added, “The Australian dollar has been well supported by the strength of the domestic and global economies together with the strong rally we’ve seen in global metals and mining markets.”
“Equally the bond spread between Australian and US government debt has also been moving in the Aussie dollar’s favour as 10-year treasuries rally back toward 2% and the 2-10 Treasury curve collapses to levels not seen since the US presidential election.”
“That in itself is a double whammy for the Aussie because the bond market rally and curve flattener is emblematic of the US dollar’s sharp fall recently. So the Aussie dollar gets the support of the bond spread with the US and the weaker dollar,” continued McKenna.
But with the metal prices pulling back on Friday, something had to give.
“But the Aussie ran into some heavy selling along with metals like copper and iron ore – both of which collapsed on Friday night. It has been a very strong run for the Aussie as the fundamentals on the Aussie side of the cross has combined with a weak US dollar to drive it to these lofty levels,” McKenna added.
One area to watch is the potential continued pullback of the Copper price.
McKenna cautioned, “But the question of what’s next becomes more problematic if the reversal in metals accelerates. I’m watching the $2.98/3.00 a pound level in copper as an indication.”
But it is the technical view on the Aussie dollar which is giving traders the biggest concern.
“In the meantime, the pin bar on the daily charts looks awful from a technical perspective. It’s probably too early to call a top just yet given US dollar weakness. But with speculative accounts still very long there is room for a decent pullback toward 80 cents, then 0.7960, within an overall trend higher,” noted Greg.
Traders will be keeping a close eye on the US Dollar over the week ahead.
McKenna said, “But more importantly is likely to be the overall move in the US dollar. And that will be heavily influenced by the US inflation prints this week. PPI is out Wednesday night with CPI Thursday night.”
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