Originally published by AxiTrader
Key Takeaway
The Australian dollar recovery continues along with the renewed strength in EM currency markets as traders and investors appear to be once again focussing on the upside of global growth, reflation, and the Trump trade.
in no small measure that means that what is good for the US dollar is also good for the Australian dollar. Naturally there is a point where that is no longer true. But to the extent that the Aussie collapsed from above 77 cents when risk went off last week it is reasonable to assume this rally is not done yet.
What You Need To Know
If the global data flow continues to print on the stronger side of the ledger and if stock traders are going to believe in the data then it is no surprise that the Australian dollar has again found support.
Of course the fact that the Aussie bounced neatly off trendline support at 0.7588 the night before didn't hurt the outlook technically. But as I have been writing across multiple markets and multiple posts fo a while now the Trumponoomics rally is as much about the actual improvement in the data as it is about expectations of the future in a Trumpnomics world.
That matters because global growth, and commodity prices are two of my 5 key pillars I look at when evaluating the AUD/USD. The others are technicals, interest rate differentials, and the US dollar.
So the recovery in commodities and stocks has allowed traders to again focus on the upside, it has improved risk appetite, and even though the US dollar is also putting in a recovery against the euro, yen, and pound - of sorts anyway - it has allowed the Aussie and EM currencies to catch a bid.
Naturally the strength of the US dollar itself will eventually be a handbrake on the Aussie - most likely as it heads above 77 cents which it is now likely to.
Equally though so to will the interest rate differential between Australian and US 2-year yields which is contracting to levels perilously close to making the holding of Australian debt over it's US counterpart unattractive for global bond fund managers. We aren't there yet - it is still a low rate world, the Fed has clearly signalled it is still going to hike, and the RBA is not.
So buying US debt is likely a losing bet relative to holding Australian debt as a pure interest rate play. But then it becomes a question of the outlook for the currency part of that trade.
At present the positives of global growth and commodity markets, plus risk appetite outweigh that risk. So the Aussie retains a bid. But like the US dollar at some point that bond spread - perhaps in the 25-30 point region from the current 45 - will become a hand brake as well.
Looking at the charts if the Aussie gets through the 0.7680/90 region I flagged yesterday a move back toward 0.7740/50 is back in the frame.
Here's the 4-hour chart:
Have a great day's trading.