The Australian dollar is facing a huge week as it collapsed to an important support level on the weekend.
“We saw the Aussie plunged to the .7540 level on the weekend after the US dollar gained strength,” said Greg McKenna, chief market strategist at FX and CFD provider AxiTrader.
“The Aussie came under a lot of pressure last week when the risk-off mood set in and stocks collapsed. There’s no way it (Aussie dollar) could sustain the .77 cents level.”
McKenna pointed out that Aussie’s close last week has left it resting on an important trend line support that stretches back to last May’s low of around .7150 cents.
He added, “The question of what’s next for the Aussie relies in no small part on the markets’ feeling about quantitative easing in general and the decision by the US Fed at this month’s meeting.”
Although it is still a week and a half away the US Fed has been consistently warning that it could increase its rate on September 21.
Markets favoured ignoring these warnings after weaker than expected non-farm payrolls, manufacturing and services PMI data was released.
But, according to McKenna, “Fed speakers have, for the most part, continued to suggest the case for higher rates has been made.”
He added, “My own sense is that the odds are closer to 60:40 in favour of a hike because the Fed has warned traders. The US economy is expanding reasonably well and the Fed wants to normalise rates consistent with the economic outlook.”
At the moment, the Aussie is facing a big week with three major events that could dictate its direction including a speech from Reserve Bank of Australia (RBA) Assistant Governor Chris Kent, the NAB Business Survey and the Australian jobs data later this week.
“At this stage, levels around 75 cents have been the accumulation zone for traders. A break would be big news,” McKenna said.
“That means the August low of 0.7487 is in some ways even more important that the trendline the Aussie is resting on. A break would signal that the run above 77 cents represents an important high.”
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