Australian Dollar Weekly Wrap

See the latest Australian dollar analysis here:

Macro Afternoon

Gee whiz if your not a short term trader the Aussie would be driving you nuts at the moment, range bound as it is but without the strength to challenge the important levels up at 1.1013.

From my point of view it remains my feeling that we have to test up there again eventually. During the week I put out a quick piece saying the Aussie was at threat from the RBA. The 1.0675 region was identified as the key, very short term, support and while the Aussie slide through there a couple of times over the week the low of 1.0655 has once again shown just how solid support is at the moment.

When you think about the hurdles in front of the Aussie at teh moment you’d say that it is doing very well. Let’s recap

  • The European sovereign issues continue to simmer away. The rating agencies are certainly aggressively asserting their independance and the downgrade of Portugal to junk increased pressure on Europe and risk assets.
  • The Chinese interest rate hike which was the 5th in 8 months also could have seen “risk off” and they’ll slow their economy eventually.
  • The RBA has gone all dovish on us and rates are on hold for a while – a long while it seems
  • US non-farm payrolls were really very weak overnight at just +18,000

But the Aussie didn’t really take these or any other catalyst for a decent selloff rather the big bounce in Australian employment this month in the data released thursday was an excuse for strength and the Aussie bounced a little but is still finding the 1.08 level hard to get through.

As you can see in the hourly chart above the reaility is that not much is happening. The Aussie is in a very tight range but appears to have certainly broken its downtrend that it was in for a couple of months.

So what does the future hold?

Unless or until equities in the US and thus globally recognise the weakness in the US economy, as highlighted by last night’s non-farm payrolls and the ECRI Weekly Leading index which was down for the 11th week ion a row then the environement for the Aussies is benign at worst and positive more likely.

How can that be would be a reasonable question for you to ask so lets quickly look at the 5 drivers.

  1. Global Growth and commodity prices: the developed world has certainly slowed and China is doing its best to slow growth further but commodity prices have broken their down trend and are on the up at present in aggregate. Recognition that Australia is tied into Asia continues to support although China is the big risk still. But we are all getting used to that and until it missteps its not an issue.
  2. Domestic growth and interest rates: certainly the RBA is on hold for a while but rates aren’t going down and growth should still be ok on a relative and absolute global basis.
  3. Global risk appetite and risk aversion: holding in much better than we could have thought given all the excuses for big selloffs and meltdowns lately. Personally I think that trade is dominated by short term players and the volatility in the data flow, for example the strong US ADP employment data followed by the very weak non-farm payrolls, is just keeping traders playing a range and big players on the sidelines.
  4. Technicals: in a  1.04-1.08 range inside the 1.010 top. No trend in evidence short term and overall longer term up trend stalling but price action is less negative now given it has tradeed sideways for a while. So neither positive or negative at present.
  5. USD: the other side of the coin – it has stopped fallling which has stopped putting upward pressure on the Aussie all other things equal.

So the Aussie is becalmed within a range against the USD. But it is stronger against Europe and GBP particularly and has even managed to rally against the Swiss Franc given risk aversion is a little lower now than a few weeks ago.

What does it all mean?

It is what it is, range bound. Ranges are dangerous markets for traders, they get bored, over trade, get their position sizing wrong and ultimately the lack of volatility and tight range sows the seeds for the eventual break out. That will come eventually but we need a catalyst

As readers know I thought on many occasions over the past couple of months that the Aussie was going to head down toward the 1.02/1.035 region yet it has not so I’m not going to get caught trying to call it higher back to 1.1013 just because I want to see if my level is strong or just a furphy.

So the old rule has to be adhered to. Trade the range until it breaks.

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