Originally published by AxiTrader
Traders and investors have talked themselves into this week's market funk.
Just ask yourself how many times you've heard the stock market selling is just part of the correction we had to have, or that stocks were stretched after January's rally.
That's important context for today's look at the Australian dollar because if stocks traders, in the back of their mind, thought a pullback was inevitable then having seen the savagery of it - unexpected savagery I'd bet - they are likely to be sidelined from not just stocks but other vehicles through which they express a positive risk appetite.
One of those vehicles for global traders and investors is the Australian dollar which, just like the Japanese yen, always reacts to market dislocations.
In the case of the Aussie volatility and the AUD/USD (and AUD/JPY) do not mix well at all.
So at 0.7785 this morning the Aussie remains under pressure after the late collapse in US stocks which saw the S&P finish 3.75% lower in overnight trade.
In some respects, the Aussie dollar's fall of just half a percent in the past 24 hours isn't too bad. But as I explained in yesterday's AUD/USD piece the perfect sunshine of solid global growth and a run in risk assets has turned to the perfect storm as assets unwind and folks forget about the positives of that growth that accrue to the Aussie and the local economy.
One thing I do want to highlight, one that will hurt the Aussie over and above what I highlighted yesterday is the intersection of what RBA governor Lowe said about rates on hold in Australia last night and what BoE governor Carney had to say about rates moving higher in the UK.
That neatly highlighted that rates are rising, that bonds will head higher also in those jurisdictions where emergency measures were necessary. But here in Australia as Lowe pointed out when he said, "we did not lower our interest rates to the extraordinarily low levels seen elsewhere after the financial crisis,” which now means “just as we did not move in lock-step on the way down, we don't need to do so in the other direction”.
As I highlighted in Markets Morning earlier, that’s one of the least aggressive, but clear, jawboning efforts I’ve ever seen from a central banker.
Perfectly pitched.
So with the AUD-USD 2 year bond spread already negative and the 10 year spread dipping into negative territory another piece of the bearish puzzle slots into place.
Realistically the only thing standing between the Aussie and much lower levels in this environment is the fact that the US dollar too is itself relatively weak.
So I retain a 0.774050 target, which is the 200 day moving average and last line of Fibo support, with a high chance that the fall extends to 75 cents.
Have a great day's trading.