For now anyway. Via Credit Suisse come some technicals:
A small top remains in place, with key support still seen at the 55-day average at .7583/64AUDUSD remains under pressure after briefly prodding beneath the crucial 55-day average support currently at .7583 in yesterday’s session. We thus maintain our bias for further mild downside as a small top and bearish “reversal day” remain in place, in addition to the RSI momentum top and daily MACD momentum also still pointing lower. Although.7583 is still essentially holding, a clear close beneath here would reinforce the top significantly and open up a move to .7464/57, just below the“measured top objective” at .7503. Immediate resistance is seen initially at .7621, then .7662/78, where we would expect fresh sellers at first. Removal of here would expose the late January high at .7704, above which would see a move back to .7764/70, beyond which would then negate the bearish “reversal day” and see a fresh test of .7782. Whilst below .7662/7704 we keep our bias for further near-term weakness, with .7583/64 still crucial.
And longer term:
The move is perhaps best viewed in the context of the large pullback in iron ore prices that took place since mid-Jan, with the front and future contract on the SGX exchange down ~14% in about 2weeks (seeFigure5). While this has certainly contributed to washing out some AUD longs caught off guard by the dovish RBA and by the relatively sudden move in iron ore prices, we are reluctant for now to make major changes to our view on AUDUSD, which we continue to see as generally supported over the course ofQ1. The following drive our thinking:
1)The move in iron ore prices is from remarkably high levels, following a large acceleration to the topside, which makes the possibility of correction ahead of the Chinese Lunar New Year holiday not an unreasonable outcome. Our commodity analysts highlight how increasingly endemic supply constraints however cast a steadily bullish outlook on iron ore, which suggests the terms of trade aspect will remain supportive.
2)The increase in QE is a dovish surprise relative to the tone of the conversation in the financial press, but perhaps not relative to actual QE expectations beyond this meeting and definitely not relative to more medium-term policy expectations, which are ultimately the ones that markets have been more focused on since the beginning of the year. At the time of writing, the 3y1m AUD OIS differential vs the US remains flat.The main change to our view that the RBA decision brings however is thatwhereas before we saw potential for idiosyncratic policy repricing to favour AUD strength, we now know that the RBA is very clearly focused on preventing specifically such outcome. What this implies is that for AUD to strengthen meaningfully back above 0.78,a broader USD move lower might be needed–a prospect that might not be immediately in the cards. This brings a shift in our view, which is now more for a rangebound outlook in AUDUSD, between 0.75 and 0.78,with potential for a move back towards our medium-term0.80 target if markets become more committed to generalized global reflation and the Fed keeps US real yields suppressed.
Given I am relatively more bearish on iron ore as the year deepens, I am that much more convinced that the Australian dollar will in the low 80s.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
