Aussie, Kiwi and Canadian dollar all under pressure

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The Australian dollar climbed​​to a high around 0.7698 yesterday morning before the sellers entered the fray and knocked it a little lower. Then, of course, the bear’s hand was strengthened with the release of China’s NBS manufacturing and non-manufacturing PMIs underwhelmed and undershot both last month’s numbers as well as market expectations.

So this morning the Aussie dollar is sitting at 0.7655, just 16 points above the overnight low and only a little more than 30 points above last week’s low.

To say the outlook is still pointing lower is no understatement as the Aussie and its commodity bloc cousins the Kiwi and CAD come under pressure.

Yesterday I highlighted that when the transmission mechanism between the renewed optimism for the global economic recovery and commodity prices is broken then the Aussie dollar suffers. Naturally, that could be the case right now because of concerns that the renewed power of president Xi will lead to more reforms in China and thus slower growth. Or equally, it could be because the rallies we saw earlier this year already factored in the good news.

Either way falling commodity prices are not good for the Aussie dollar. And when you throw in the Australian-United States 2-year bond spread, which fell again overnight, and the US dollar’s strength you end up with an outlook which is pointing down for the AUSDUSD.

Equally the data flow in Australia has been a handbrake on the AUDUSD recently as well.

As readers know I’m a behavioural economics and finance guy. That means one of the things I believe is that where the data prints relative to expectations is more important for market moves than where the data actually prints. Naturally, over the medium term, it’s the data’s actual outcomes which tell us where the economy is and is headed. But in the short run, it’s the data prints relative to expectations which are the key because that’s the measure of data miss and that in turn influences traders’ reactions and behaviours.

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Anyway, the latest print of the Citibank economic surprise index for Australia is -11.6 whereas when the Aussie was up at 81 cents this indicator of data beats and misses was up at +30.

None of these drivers is in and of itself enough to impact the Australian dollar. But when you put the two charts and those indicators together then it’s not hard to see where the pressure has come from.

It’s why there is an increased chance of the Aussie dollar “doing a Kiwi” and making a full round trip to the start of the rally which would put it back in the mid 73 cent region.

That’s the rhetorical outlook anyway.

The AUDUSD has now spent a few days under the 200-day moving average, under the breakdown level, and under 77 cents where it failed yesterday. It has to regain this level, and more likely 0.7730 and 0.7780 to change what is an outlook that still points lower.

We might be building a base here above Friday night’s low. There is a similar possibility in the Kiwi and CAD which are just above important levels against the USD. So, I’m not going to get uber-bearish right now, not today.

But if 0.7620 gives way then a drop of 100 points looms reasonably quickly.

Solid data, out of China or here at home, could cure the Aussies problems. As could a weaker US dollar. China’s Caixin PMI and the raft of global PMI releases over the next 20 hours will be important short-term drivers.

In other forex market news, there’s genuinely not a lot to say about forex today. The battle between the bulls and the bears for the Euro and US dollar outlook continues. Both economies are printing reasonable growth outcomes at the moment which is the reason why the Euro has retained its strength. Even though the inflation data last night support Mario Draghi’s stance on monetary accommodation it’s clear traders haven’t given up on the fact he’ll eventually have to fold and follow the Fed in reducing accommodation and eventually tightening rates. That said EURUSD still looks biased lower while it stays below 1.1750.

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The pound is having a cracker and at 1.3280 is more than 2 big figures above Friday night’s low. Key here is the twin advantages that accrue to it from more positivity about the Brexit negotiations and outlook and expectations the BoE will hike rates. My sense is still that it will be either no hike or a very dovish one-and-done hike. But that’s my rhetorical self. The buyers are in and GBPUSD has overnight taken out the recent downtrend. 1.3350 and 1.3410 are now resistance.

USDJPY broke the uptrend line and then recovered to just below the previous days high in the past 24 hours. At 113.69 now that confuses the outlook somewhat. But the recovery is something the BoJ will be happy with given that it wants to retain an accommodative policy as long as possible. Yesterday’s no change was actually accompanied by the newest member of the board voting to again ease policy. It certainly shows where the BoJ is at present and it’s a very different place to the Fed.

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