Aussie dollar’s rally stalls

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The overriding narrative in forex markets at the moment is a lack of confidence in the US dollar. That this is the case when the economy is so strong and when the US Federal Reserve has been tightening for a​​n extended period and is likely to continue to do so has been a most interesting dynamic in global markets recently.

Naturally, the reason for that is best explained by the synchronisation of global growth and forex traders discounting the expectation that the European Central Bank, Bank of Japan and others will eventually follow the Fed in removing monetary accommodation and raising rates.

That the ECB is doing its best to forestall that seems a moot point.

But while the Euro is back up in the mid 1.18’s region, while USDJPY is back near 111 and while even the GBP looks like it could be actually breaking higher the Aussie is still languishing toward the bottom of the recent range.

Of course, that’s because of all the various things I’ve been writing about recently including the collapse of the bond spread between Australia and the US.

But as I’ve written recently the US dollar side of the argument is important so the AUDUSD has lifted from its lows and is sitting at 0.7626 – up 0.13% day on day.

So far it has been unable to take out the top of this downtrend channel which comes in around 0.7645 and which I would consider significant resistance. That’s naturally because I respect lines and levels unless or until they break. But it’s also because my sense is that traders will have a weather eye on what is going on in Chinese markets right now.

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China

Yesterday saw Chinese stocks have their worst falls in close to a year and a half as traders fret about a regulatory clampdown and as the 10-year bond hit, held, and closed at 4%. So, if China has a second day of weakness, if the 10-year bond continues to rise above 4% then the Aussie sticks out as a deep and liquid way to hedge against a China dislocation.

The good news for the bulls is my system is pointing higher. Although I did take my longs back above 0.7630 last night given where the top of the channel is. But if the Aussie can break 0.7650/60 it could run toward 0.7750.

It has to break first though.

On the downside, support remains 0.7595 and 0.7570.

It should be a fairly quiet day unless China kicks off and the weakness in stocks continues and seeps into metals and regional markets.

US dollar

In other forex market news, the US dollar has continued to be pressured by the apparent dovish tilt by US Fed chair Janet Yellen and the FOMC. That’s genuinely fresh news this week and suggests the arguments being run by Neel Kashkari and James Bullard are gaining traction among their colleagues at the Fed. And this change – or at least the apparent one evinced by Yellen’s comments this week’s and the Minutes – introduces an element of uncertainty into the next meeting of the FOMC on December 13 and 14.

Not so much on the December tightening – which is almost universally expected and the minutes intimated is still coming. Rather the uncertainty stems from the outlook the Fed will articulate via its statement, the Dot Plot, and the press conference that Janet Yellen gives post meeting. The risk for the US dollar is that the Fed’s candid revelation it’s unsure on inflation tempers the expectations for rate hikes in 2018. That is likely to put the USD under downward pressure.

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And that subtle downward pressure has the US dollar on the backfoot this morning. Euro in the mid 1.18’s, USDJPY down near 111 and the pound above 1.33. The USD is weaker almost universally it seems with Asia and emerging market currencies also mostly stronger against the greenback.

Canadian dollar

That trend has helped the commodity bloc via the virtuous circle of weaker US dollar also feeding into strong commodity prices. But each of the Aussie, Kiwi, and CAD ran into a little bit of selling overnight. The CAD, in particular, suffered under the weight of much weaker than expected retail sales for September which printed +0.1% against +0.9% expectations. It has been a solid year though with year on year growth dropping but still printing a 6.2% growth rate.

Kiwi

On the day ahead NZ trade will be important for the Kiwi which has broken a very steep little downtrend in the past couple of days. A weekly close above 69 cents would be quite bullish if the Kiwi can manage that.

That makes two out of three of the big commodity bloc currencies that have broken downtrends. The Aussie is the laggard in that regard and needs to push up and through 0.7645 to do that. Important for the Aussie today is what happens in China. Was yesterday’s stock selling a one day wonder or is it something more pernicious. Not much fazes markets at the moment but if China has the second day of weakness, if the 10-year bond continues to rise above 4% then the Aussie sticks out as a deep and liquid way to hedge against a China dislocation.

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