With a range of just 35 points in the first 24 hours of trading this week the Aussie dollar lagged the gains seen in the bigger pairs as the catalysts for further US dollar strength seemed to be lacking as traders instead focussed on the Mueller investigation and the race to be the next Fed chair.
That’s left the Aussie dollar higher this morning but still in the mid 0.7680 region.
But while it would be easy to say the performance of the AUDUSD has been poor these last 26 hours or so, I take a slightly different bent insofar as it’s my sense the Aussie actually did really well yesterday when metals and iron ore were again under intense pressure on Shanghai futures markets.
To me, that continues to set up the chance of a rally to 77 cents and then into the 0.7720/30 region if official PMI data from China today is positive on the outlook for growth.
But as I highlighted yesterday, in the absence of a full retreat by the US dollar, it is positioning, and just how long speculative traders are right now, that will continue to act as a handbrake on any rally back into the low to mid 77’s.
Medium term the drivers of the Aussie dollar are pointing lower.
Iron ore has collapsed to $60 a tonne again, that’s the lowest level in 4 months. Likewise, the AUDUSD 2-year bond spread has collapsed to just 24.93 points which is the lowest in years.
Certainly, global growth is providing a positive backdrop for the Aussie. But if that is not translating into stronger commodity prices for Australia’s export basket – as it’s not at the moment – then the transmission mechanism between global growth and a higher AUDUSD is broken.
It again reinforces that the chances are high that the Aussie is going to “do a Kiwi” and make a full round trip to where the recent run above 81 cents started. That level, in the mid 73 cent region, is now my rhetorical target in the absence of the only thing that can probably derail such a move – a weaker US dollar.
The USD Index continued to back off from its highs overnight losing 0.4% in DXY terms to 94.55. Against the Euro, the USD lost 0.3% with EURUSD up at 1.1643. Sterling was much higher rising 0.6% as traders get ready for the BoE and the Yen has had a half a percent gain in the past 24 hours with USDJPY back at 113.12. The Commodity bloc of the Aussie, Kiwi, and CAD are all lagging these moves in the bigger pairs. But the Kiwi’s performance was actually pretty good given it was down sharply at one stage yesterday. It’s at 0.6872 this morning, the CAD is at 1.2833 in USDCAD terms while the Aussie has had just a 32 point range to start the week. AUDUSD is at 0.7682 this morning.
US dollar lacks catalyst to push higher
The US dollar lacked the catalyst to push higher overnight as the news of the phase in of the tax plan and likely appointment of Jerome Powell as Fed chair undid some of Mario Draghi’s good work last week to signal a strong policy divergence among central banks. Indeed while that is still going to be an important driver of forex over the months and quarters ahead – and something I think is still under-priced – there is a continuation of the theme that says the US dollar may suffer because we have this synchronised global growth outlook. That’s because as the global economy growth other opportunities arise which will limit the impact of the margin expansion in favour of the US dollar. This dollar rally, as it continues, looks like it is going to have to climb a wall of worry.
Looking at the Euro specifically the fact that an opinion poll suggests the pro-independence vote is behind in the new Catalan elections and an unexpected lift in the Italian rating helped sentiment toward the single currency while the USD was lacking traction. That’s taken the Euro back to the breakdown zone at 1.1650 just 10 points below. Traders might be wondering if this has been a false break.
USDJPY is looking a little ominous for dollar bulls. It’s rolled over and broken two trendlines. One from the last couple of week’s rally and one from the start of this surge back in September. It’s a confused outlook but one that might be pointing lower. A break of 112.85 could precipitate a deeper retracement. USDJPY this morning is at 113.14.
GBP has had a good night, respecting trendline support and rallying 0.6% to 1.3206 as traders buy pounds while the US dollar loses ground and while they wait for this week’s expected BoE rate hike. I still think the BoE will either pass or try to produce a dovish hike. We’ll see.
On the dollar bloc as discussed above it has been a night of lagging. The Kiwi bounced back after US dollar weakness realised the pressure that was brought to bear after the new finance minister said rates in NZ might be lower under new RBNZ operating rules.
Like the Yen, the CAD looks like it might have turned with USDCAD up 0.14% at 1.2821 but also looking like it could have made a significant short-term top. It could just be a pause in the rally of course but the high last week was at the 50% retracement level.
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