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The Aussie Dollar Has Recovered A Little But Positioning Remains A Constraint

Originally published by AxiTrader

The Australian dollar fought back a little from the low of 0.7625 on Friday night as the US dollar went a little offered in the wake of market reaction that Jerome Powell, not John Taylor, is again the front-runner to succeed Janet Yellen as the next Fed chair.

That saw the US dollar lose ground broadly as Powell is seen as less hawkish than the mechanistic Taylor. The thinking goes that Powell would continue the path set by current Fed chair Yellen while Taylor would accelerate both the taper of the Fed's balance sheet and the pace of rate hikes.

President Trump promised on Instagram he'll announce his decision this week - so we'll know soon.

Back to the Aussie specifically and the fact that prices had fallen so far and fast meant that AUD/USD had dropped outside the Bollinger bands (2 standard deviations from the 20-day moving average). That usually an event which is coincident with some sort of support entering the market. Or more correctly short term selling fatigue.

But the fact that the Aussie rallied even as base metals and iron ore came under heavy selling pressure once again, and as copper broke support, tells us this is really a US dollar move inspired recovery.

That's important in the medium term context because as I highlight in this piece, US dollar economic data flow and euro positioning suggests the overall run higher in the US dollar has further to run.

As one side of the AUD/USD rate, the US dollar moves are of vital import. So with a further prospect of US dollar strength, the Aussie will continue to be offered on rallies and remain pressured.

That's particularly the case because like the euro the level of Aussie dollar longs held by speculative accounts remains elevated at present. Certainly, the CFTC data released Friday showed another fall in positioning with the net specs printing 57,250 against 61,800 last week and 77,194 4 weeks ago. But even at current levels the positioning of Australian dollar longs is at the upper end of the range since 2013.

That means the Aussie dollar could remain under pressure and even though the data is at last Tuesday - suggesting some further selling may have occurred toward week's end as the Aussie fell - the risks are it remains offered and will continue to drift lower.

Indeed it's reasonable to suggest that the AUD/USD could go back to test the breakdown levels around 0.7690/95 perhaps 0.7730/35.

Overall, however, the outlook for the US dollar and that of the Aussie on it's own suggests lower levels beckon. 0.7575/85 seems the next reasonable target. However the chances of a run back under 74 cents are growing.

Have a great day's trading.

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