Australian dollar trapped in a tight range


The Australian dollar is trapped between the bulls and the bears and seems to be going nowhere at the moment.

“The reality is the Aussie is being buffeted by moves in markets offshore and the US dollar specifically,” said Greg McKenna, chief market strategist at CFD and FX provider AxiTrader.

That may change with the release of the NAB’s business survey today. Another factor that could move the Aussie dollar, according to McKenna is if the Bank of Japan (BOJ) upgrades its assessment of the Japanese economy at today’s meeting, which will drive Yen buying.

“But for the moment only a break of either side of the range will wake Australian dollar traders from their slumber,” McKenna said.

In the meantime, the economics team at the NAB is so worried that they again reiterated yesterday that they believe this construction slowdown this year, and in prospect for 2018, would lead the RBA to cut rates twice this year.

“That would take rates in Australia to 1% at a time when US rates are rising,” McKenna said.

“There is little way the Aussie dollar could escape such an eventuality and remain much above 70 cents. International investors would simply have now incentive, no pickup, to buy Australian bonds and other assets,” McKenna added.

Fear index spikes as investors consider Trump’s EOs and tweets

The stock market’s fear index (VIX) spiked 15% higher overnight as stocks in the US lost around 1% and fear of the impact of Donald Trump’s plethora of Executive Orders since taking office gripped traders.

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“The fulcrum for the fear and selling in stocks and the US dollar (at least against the Yen and Swiss Franc) was the public’s visceral response to the president’s immigration and travel ban,” McKenna said.

He added that the Executive Order seems to have ignited a focus on the dark side of some of the president’s policies.

“So we saw traders taking a little bit of money off the table, selling stocks and buying downside protection against a further fall in stocks,” McKenna said.

However, McKenna pointed out that the sharp rise in the VIX index came from a very low base.

“If you look at the VIX price action over the past two years, this 15% means little in the grand scheme of things,”

“Because it is a lift off a base which had seen volatility – during the Trump rally – fall to levels around the lows that the VIX traded to over the past 10 years.”

Investors and most traders are by and large long only. That is, they buy and hold stocks but rarely sell them. That means they are only concerned with the negative side of volatility, when prices fall, and remain unconcerned as stock prices rise.

This is why the VIX is also commonly referred to as the “fear index”.

But the big question this morning is whether last night’s fall in stocks and rise in the VIX is a sign of more weakness and increased volatility to come.

McKenna also said last night’s move is a one-off at the moment.

“It wasn’t even confirmed with a move in gold back above $1200 an ounce in US dollar terms,” he said.

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So far we’ve had only one night of selling. It’s the first material reappraisal of the Trumponomics rally in stocks since the surge higher began in November last year.

According to McKenna, “The raft of executive orders from the White House together with Tweets, and belligerence from the president since taking the oath of office have simply reminded markets that there is some darkness in Trump’s policies and Trumponomics.”

He said at the moment traders are just undergoing a reappraisal of the payoff between the positives and negatives of the new Administration’s policies.

“That could take some time, or it could be a one day wonder. Time will tell,” he said.

About AxiTrader

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