Originally published by AxiTrader
Quick Recap
Dollar-Yen above 110, Euro below the trendline that stretches back to 1999, and the US dollar index at the highest level since 2003 is not a combination you'd expect to coincide with Aussie dollar strength.
So it's no surprise that the AUDUSD is down near 74 cents this morning, below the bottom of the recent 0.7450/0.7750 range.
What You Need To Know
As readers know the US dollar is an integral part of the analysis framework of the Australian dollar that I use. That's natural of course because the US dollar is the other side of the AUD/USD pair.
This chart, from my Reuters Eikon terminal, simply shows the relationship between the AUDUSD and the US dollar index (inverted).
What's clear is that this surge in dollar buying as traders bet that the central bank policy divergence they were looking for a year ago is now happening must naturally weight on the Aussie dollar. But it hasn't weighed so far as much as it could if commodities reverse, if it looks like the RBA is going to cut, if the Australian economy falters, or if risk appetite weakens. Then the selling really could intensify.
Looking at the chart of the Aussie it's clear the last line of Fibonacci support is sitting at 0.7386. In a purely technical perspective that would open up the chance of a move back to 0.7145.
Is it possible? Of course it is as the relationship between the US Dollar Index and AUDUSD shows. Is it likely?
Is it likely? That's a move difficult question to answer.
My approach to trading is that I go through a serious of IF/THEN statements. So if 0.7386 holds then the outlook for the Aussie is unstable but not terrible. If the rally on shanghai metals we saw yesterday continues today then that should support the AUDUSD.
But equally if the Aussie closes the week below 0.7486 then the very long market is likely to get flipped then that would put downward pressure on the Aussie between now and the next Fed meetiing.
0.7386 is the key short term. If that breaks then 0.7290/0.7300 will be the next level traders focus on.
Have a great day's trading