Originally published by AxiTrader
The Aussie dollar traded up to a high around 0.8027 last night. That's roughly just 5 points below the high for January we saw late last week.
The catalyst for the move was the double whammy effect of a weaker US dollar aiding the move in AUD/USD and that then being reinforced by a weaker US dollar aiding commodity prices which were also higher. The continued lift in risk appetite as stocks keep rising and as the IMF upgraded the economic outlook for 2018 and 2019 to 3.9% certainly helped the Aussie as well.
But the reality that for all the Aussie dollars positives and feedback loops in risk appetite and commodity prices the reality is that this rally over the past 6 weeks or so has largely been all about the US dollar.
To highlight the extent to which the moves in forex and commodities are all about the US dollar let me reiterate what I mentioned yesterday about correlations, but in a broader context.
The Aussie dollar's price correlation with the euro over the past 35 trading days is a very robust 0.94. Indeed it is above 90 with the Swiss franc, Chinese yuan, Singapore dollar, Canadian dollar, and New Zealand dollar, while against the British pound the correlation is 0.86 and with the Japanese yen it's 0.78.
That's the kind of correlations you often see between the Aussie, kiwi, and Canadian dollar but not usually across the board. Indeed the 95 day correlations outside of the commodity bloc are far lower. When you throw in oil's 0.9 correlation with euro over the past 35 trading days you get a sense of the extent of the US dollar's influence on markets right now.
It means everything hangs on the US dollar, its direction, and its moves.
And because of the feedback loops with commodities that direction, the current weakness, is doubly important for the Aussie dollar.
Which means how Governor Kuroda and President Draghi frame their message about the healing of the Japanese and European economies and the outlook for policy are going to be as important for the Aussie as they are for the yen and the euro.
It is going to be an interesting week.
Looking at the charts then and the fact that the Aussie held above 0.7980 (actual low briefly around 0.7978) and below last week's high at 0.8032 suggests to me these are the two near term levels to watch.
A break of 0.7980 would open the way back to 0.7935 which is the level I'm watching closely this week for a sign the top is in. If it breaks a move lower of a further 100 points would be on the cards.
But the way things are going for the US dollar the chances are a topside break is more likely right now. On that front, a break of last week's high would suggest a run toward the top of the current uptrend channel at 0.8060 and if that breaks the 81 cent level where the selloff to 75 cents began is in the frame. And then above that the 2017 high.
Have a great day's trading.