Originally published by AxiTrader
The Australian dollar is back near 81 cents this morning trading at 0.8074 after gaining around 1% in the past 24 hours. It's almost back to the 2017 high.
So with the US dollar so weak it's worth not only wondering how far that weakness could take the Aussie dollar but also what the economic impact here in Australia and the RBA's response might be.
Looking at the US dollar it is worth highlighting that the high level of correlation between forex pairs since the US dollar's demise started around 6 or 7 weeks ago is much higher than normal. Indeed while the US dollar as the other side of the Aussie, euro, yen, pound and other pairs does cause a certain level of correlation the AUD/EUR price correlation over the past 35 days is around 0.95 while over 95 days it is a lower at 0.63.
It's the US dollar which is the overriding narrative during this period. So unless and until the US dollar can find support or turn around, the AUD/USD retains a bias lower.
In my Market's Morning piece today I have tried to identify levels where the dollar may find some support. The first is the 88.30/50 region I’d identified a while back as a possible level based on a previous high in 2010. But there is a coincidence of support/target in the mid 86 region from both a trendline and FIbo extension of the break of the previous low at 91.
In percentage terms that would imply a move by the Aussie dollar into the 0.8065-0.8330. A wide range I know. And yes we have the preconditions in place for the pessimistic crescendo but it's still unclear in the current environment exactly where the US dollar will find bottom.
Turning then to the economic impact there is little doubt that a higher Aussie dollar will - all other things equal - restraining growth. It's why the RBA governor has been saying in his statements after RBA board meetings recently that "an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast".
The flip side of that, of course, is exactly why US Treasury Secretary Steve Mnuchin said overnight (my bold),"Where it is (US dollar) in the short term is not a concern for us at all. A weaker dollar is good for us as it relates to trade and opportunities".
Back in August when the RBA released its SoMP the Aussie was at 80 cents and the outlook was still for growth to head up toward 3% over time regardless. That was before the obvious, and material, lift in overall global growth. So my sense would be the Aussie's rally will be a little sand in the gears of the transmission mechanism between that global lift and the attendant benefits to the Australian economy.
But on balance, the economy should be unduly harmed by an 80, 82, or even 83 cent Aussie.
Indeed, the RBA is also a most pragmatic central bank understanding that there are ebbs and flows in the level of the currency, many of which it can do little about. That's particularly the case when we have the high level of correlation and moves driven by the US dollar weakening story that we are seeing in forex markets at the moment.
Looking at the shorter term outlook the Aussie remains in this current - still very steep - uptrend. And that remains the overarching path of least resistance. Unless, or until, that trend breaks.
Have a great day's trading.