The Australian dollar continued to feel the weight of a strong US dollar overnight.
“We saw the Aussie hit a low of 0.7512 overnight before the buyers entered the fray and bought it back to the mid-75 cent region,” said Greg McKenna, chief market strategist at CFD and FX broker AxiTrader.
According to McKenna, the currency markets are now more preoccupied with ‘bigger fish’ to fry like the Japanese Yen, the Euro, the British Pound, as well as emerging markets currencies.
He said, “Clearly the move in the US dollar has swept all before in EM forex as well as Euro and Yen. But the big question is where is the next leg of this rally is going to come from?”
McKenna identified the possible sources of continuing US dollar resurgence.
“Is it going to come from stronger US growth, higher inflation, and the US Fed rates,”
He added that “If it is, two of those three legs are supportive of the Australian dollar as the world’s favourite growth punt.”
“In the meantime, the stability of the Aussie means that even though it is stuck in an eddy the outlook might actually be brightening for it,” McKenna said.
Meanwhile, other global central banks could also be reviewing their next moves.
The Bank of Japan (BOJ) is promising more easing, the European Central Bank (ECB) is likely to extend its own QE program the Reserve Bank of Australia (RBA) looks set to hold fire unless or until there is a deterioration in the labour market, which threatens consumption and domestic growth.
According to McKenna, “That’s still a possibility but maybe a 30% chance at present.”
Equally on the positive side, stronger growth in the US likely means stronger growth across the globe in time. “And this could be positive for the Aussie dollar,”
In the immediate tern, McKenna reckons “The next move in the Aussie might actually come from the US dollar bulls backing off their current aggressive stance.”
Given all the positives that accrue for the Aussie in the current global environment, McKenna said we should see the Aussie back up in the mid 76 cent region and knocking on the door of 77 cents again.
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