Originally published by AxiTrader
Dead cat, or real?
That's the question traders will have been asking themselves about the US stock market recovery late Friday afternoon New York time as trade kicks of this week. And that is also the question that traders may be asking themselves about the Australian dollar - among other pairs - which were so heavily influenced by last week's equity market funk.
Certainly the bounce in the Aussie from 0.7760, a level just above the important 0.7740/50 region which contains both the 200-day moving average (0.7750) and the 61.8% retracement level (0.7744/5) of the 75/81 cent rally, though consistent with the bounce in stocks was also from a zone of support traders have been eyeing.
But the combination is a strong one which could see the Aussie higher against the US dollar early in the week given that the 35 day price correlation between AUD/USD and the S&P 500 sits at a pretty solid 0.8850.
And although the recovery in US stocks, should it continue, is likely to buoy the Aussie dollar bulls and give them succor. There is every chance that unless the US dollar falls completely out of bed again that sellers will be lurking on any Aussie dollar rally.
I say that because the data in Australia has started to disappoint once again. Indeed the Citibank Economic surprise index for Australia is back at just 2.4, down from 47.7 on January 29. And that has combined with, or perhaps been a source of, the underperformance of Australian bonds relative to the rise in US rates which has seen the spread dip to -10.5 in the 2 year part of the curve and -2.25 at the 10-year part of the curve.
That means global bond managers can only really justify buying Australian dollars if they feel like they are going to make a capital gain on the back of factors such as global growth and commodity markets. Likely still good bets. But also likely currently swamped as those very same global investors have bigger fish to fry given the maelstrom engulfing bond and stock markets currently.
Which brings me back to thinking that based on the correlation with stocks and the reality of diverging central bank outlooks - as the Fed tightens and the RBA stands pat - that any rallies in the Aussie dollar will be offered.
The question is where from? And on that front, as usual, I turn to the charts.
As Monday starts the Aussie is sitting around 78 cents in very early trade. The low of 0.7760 on Friday night was 15 points above the 0.7744/5 level which is the 61.8% retracement level of the rally from 75 cents with the 200 day moving average sitting at 0.7748/9. This is the big support zone. A break would see a potential round trip back to 75 cents.
For the moment though, that break and run has been forestalled by the bounce in US stocks.
NAB business, Westpac consumer confidence, and January employment data are all out this week and should be supportive of the other. But I have to add the caveat all other things – including more stock market funkiness – equal.
Looking at the 4-hour charts the Aussie has broken up and out of the little downtrend it had been in from above 81 cents on Friday night. It had been quite narrow and steep so that is no real surprise. Key to the outlook now is Friday's high at 0.7830. If that level breaks then it would suggest a move back to 0.7893 which is the 38.2% retracement level of the run to last week's low at 0.7760.
Looking at the daily chart it is clear that between 0.7720 and 0.7775 there is a lot of support. Besides the Fibo and 200 moving average there is also the 100-day moving average and an old, and persistent, series of highs and lows in 0.7720/30 region over the years.
A break of this region would set up a run to 75 cents however.
Have a great day's trading.