Australian dollar fights back; US dollar rally may go further

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The Australian dollar fought back a little from the low of 0.7625 on Friday night as the US dollar went a little offered in the wake of market reaction that Jerome Powell, not John Taylor, is again the front-runner to succeed Janet Yellen as the next Fed chair.

That saw the US dollar lose ground broadly as Powell is seen as less hawkish than the mechanistic Taylor. The thinking goes that Powell would continue the path set by current Fed chair Yellen while Taylor would accelerate both the taper of the Fed’s balance sheet and the pace of rate hikes.

President Trump promised on Instagram he’ll announce his decision this week – so we’ll know soon.

Back to the Aussie specifically and the fact that prices had fallen so far and fast meant that AUDUSD had dropped outside the Bollinger bands (2 standard deviations from the 20-day moving average). That usually an event which is coincident with some sort of support entering the market. Or more correctly short-term selling fatigue.

But the fact that the Aussie rallied even as base metals and iron ore came under heavy selling pressure once again, and as copper broke support, tells us this is really a USD move inspired recovery.

That’s important in the medium term context because as I highlight in this piece US dollar economic data flow and Euro positioning suggests the overall run higher in the US dollar has further to run.

As one side of the AUDUSD rate, the USD moves are of vital import. So with a further prospect of USD strength, the Aussie will continue to be offered on rallies and remain pressured.

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That’s particularly the case because like the Euro the level of Aussie dollar longs held by speculative accounts remains elevated at present. Certainly, the CFTC data released Friday showed another fall in positioning with the net specs printing 57,250 against 61,800 last week and 77,194 4 weeks ago. But even at current levels, the positioning of AUD longs is at the upper end of the range since 2013.

That means the Aussie dollar could remain under pressure and even though the data is at last Tuesday – suggesting some further selling may have occurred toward week’s end as the Aussie fell – the risks are it remains offered and will continue to drift lower.

Indeed it’s reasonable to suggest that the AUDUSD could go back to test the breakdown levels around 0.7690/95 perhaps 0.7730/35.

Overall, however, the outlook for the USD and that of the Aussie on its own suggests lower levels beckon. 0.7575/85 seems the next reasonable target. However, the chances of a run back under 74 cents are growing.

​​US dollar rally can run much further?

The US dollar rallied up and through the recent range top in dollar index (DXY) terms last week and broke important support at 1.1660 against the Euro.

These late week moves came largely as a result of more pushback from central bankers against the prevailing market view that the uptick and synchronisation of global growth meant there was also a synchronisation of global central bank policy.

But both the Bank of Canada and the ECB both signalled clearly they will be charting their own course.

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And the US dollar’s rally was the result of EURUSD falling into the 1.1570’s before recovering to 1.1610 this morning while the USD Index rose above 95 before pulling back into the 94.80’s this morning.

Such a swift move in the space of a couple of days naturally leads to some question about the pace of the move. But I want to share two charts which suggest that this USD move could run much further.

Firstly, the improved data flow in US economic data and Mario Draghi’s clear message the ECB is at a very different point in the cycle to the US Fed supports a much bigger fall for the EURUSD.

A big part of the US dollars weakness was the improved sentiment toward the Euro project that resulted from the French election. But it’s equally the case that around the time traders stopped worrying the EU could pull itself apart US data started to collapse.

US data flow, as measured by the Citibank Economic surprise index for the US, has been picking up over the past couple of months. And while that helped the USD bottom to a certain extent it was the fact that traders saw a synchronisation of growth and thus central bank policy which held back the rally.

Now that Mario Draghi, and other central bankers, have signalled the return of policy divergence the USD is free to play a little catch-up. Perhaps not the 1.08 level this relationship between the CESIUSD and the Euro implies. But certainly towards the 1.1240 region where the 200-day moving average. sits.

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Looking at the Euro it’s still the case that 1.1500/20 is the first target as the 38.2% retracement level of the big rally from April. Once that – assuming it does – gives way then there is every chance Euro falls toward the 200-day moving average at 1.1240.

USDJPY pulled back from Friday’s high as the Catalan issue garnered some attention and it and the Swiss franc gained a little better bid. USDJPY is at 113.72 and USDCHF is at 0.9973 as a result – both well off their highs.

GBP ended the week on the back foot as traders await the BoE meeting this week and wonder if Mark Carney and his colleagues will indeed raise rates. GBPUSD is sitting at 1.3123 holding above important trendline support which comes in at 1.3030/40. We’ll know Thursday what the bank does. My sense is we’ll either see no move or a very dovish lift. Either is likely to pressure Sterling.

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