Originally published by AxiTrader
The fact that the low in the AUD/USD Friday of 0.7838 was around the time RBA governor Lowe was speaking to the House of Representatives Economics Committee made it clear Australian dollar traders were a little worried about what Governor Lowe might say about the level of the exchange rate.
But, in response to a question about the current level of the Australian dollar - and what the RBA would do about it - Lowe said that intervention was a possible tool available to the RBA but that he didn’t see any need to use it at the moment.
Naturally, the AUD/USD low was in once he said that.
Of course the reversal of the US dollar across the board subsequently helped lift the Aussie dollar up and through the August downtrend where it sits this morning at 0.7894.
But does that mean the Aussie is out of the woods, that the sell off is over?
It's an interesting question as we start a week with important Chinese data on retail sales, investment, and industrial production out in China today and the RBA board minutes out tomorrow.
We know two things about these events. That is, Chinese and Australian growth has confounded the doomsayers with strength over recent months and their respective Citibank Economic Surprise indexes sit at +41.3 and +44.8 respectively.
Hence the strength of both the yuan and Aussie versus the US dollar.
That currency strength has risks for both economies.
Indeed while governor Lowe said he's not interested in intervention as a policy tool to restrain the Australian dollar right now there has to be a strong chance that the minutes of the RBA meeting earlier this month reflect a discussion of the impact higher Aussie dollar on the economy.
Recall that Lowe said in his statement after the board meeting that:
"The Australian dollar has appreciated recently, partly reflecting a lower US dollar. The higher exchange rate is expected to contribute to subdued price pressures in the economy. It is also weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast."
But the overall strength of the economy has been the focus of the buy the dip crowd - who have supported the AUD/USD on pullbacks and above 78 cents - the macro backdrop has taken on a new significance.
Certainly the moves in the US dollar Friday suggest that the initial moves in currency markets on the North Korean tensions have been made. But you have to wonder what game Kim Jong-un is playing right now as he seems to both back himself into a corner and goad the Americans into a response.
A further escalation would undermine risk assets like the Australian dollar. Likewise, this emerging weakness in stock markets could do likewise.
Likewise, this emerging weakness in stock markets could do likewise.
On Friday night we saw the S&P 500 recover from a test of trend line support to finish the day mildly in the black with a 0.12% gain. But it was still down 1.4% on the week (see my morning wrap for the chart).
And while the day to day correlation between the Aussie dollar and stocks is negligible the rally in the S&P 500 has contributed to an overall uptick in risk appetite in markets and thus been part of the mix which has driven the AUD/USD to recent highs around 0.8060.
Investor risk appetite is always important for the Australian dollar. Under current circumstances with North Korea and stocks swooning a little, traders will be watching closely. That's particularly the case after the breakout of the VIX last week from around 9 to 15.5 by week's end. Twitter chartist Aphabub has a neat chart which shows this might actually be a very important break higher and transition toward more stock market volatility.
And that brings me to the chart of AUD/USD.
Price traded down to my slow moving average and my position is now reduced to just a quarter of the original level.
0.7915 is the 38.2% of the August trend line which Aussie broke Friday night with the 50% and 61.8% levels at -.7940 and 0.7964 respectively.
Should AUD/USD get through the higher of these levels then there would be a strong technical case that AUD/USD is heading back toward the highs for this run.
Alternatively, if 0.7838 gives way then support is at 0.7816 (200-day moving average), 0.7790.7800 (trendline and FIbo support).
Have a great day's trading.