Originally published by AxiTrader
Key Takeaway
At 0.7629 the Australian dollar remains under pressure again this morning. But it also found support when it dipped toward 76 cents again last night making a low around 0.7610 before the buyers returned.
So we have an AUDUSD which traded a 53 point range over the past 24 hours and is trapped between the graveyard of the bulls above 77 cents and a clear level of buying in front of 76 cents.
What's next depends, unsurprisingly, on where the US dollar heads. And while the charts suggest a break of 0.7580/7600 would swiftly usher in a big fall, fundamental support is accruing to the AUD/USD from the lift in risk sentiment and the bullish outlook from the Reserve Bank of Australian growth.
What You Need To Know
Unlike his counterpart across the Tasman RBA governor Phil Lowe doesn't seem concerned about the level of the Australian dollar and any adverse impact it could have on growth. Either that or he thinks that when the fed hikes rates and Donald Trump's stimulus plan takes effect the AUD/USD will naturally fall.
I say that because it would have been hard for governor Lowe to be more optimistic about the outlook for the Australian economy than he was in his speech last night to the A50 Australian Economic Forum Dinner in Sydney.
Governor Lowe reiterated that the even though Q3 GDP in Australia last year had unexpectedly fallen "this largely reflected a confluence of temporary factors". As a result, the RBA expects "that in the December quarter, the economy returned to reasonable growth" Lowe said.
But he went a step further noting my emphasis:
Over the next couple of years we expect GDP growth to be around the 3 per cent mark. In both years it will be boosted by a significant pick-up in LNG production. And the headwinds that we have been experiencing from the unwinding of the biggest mining investment boom in a century will blow themselves out. Indeed, we are already around 90 per cent of the way through the fall from the peak to expected trough in mining investment. Another headwind we have had over recent years – that is the decline in our terms of trade – has already stopped. Since earlier last year, a rise in global commodity prices has provided a boost to our national income. And the improvement in the global economy since late last year should also help us.
That's pretty positive. And it is suggests, again and in line with the governor's statement after the decision to leave interest rates at 1.5% this week, that the door to another rate cut is slowly closing.
Indeed as I wrote in my overnight market wrap this morning "The implication for forecasters saying there will be rate cuts in 2017 in light of what the bank has been saying for the last 4 months is that these pundits are betting the RBA will be wrong".
That's a big bet to take against a central bank with a formidable track record.
On the currency specifically the governor - in talking about Australia's commitment to open economies and trade - said Australia provides "a very good illustration of how a medium-sized country that is committed to an open international order, has a strong role for markets and a floating exchange rate, a largely open capital account and a dynamic and innovative financial sector can prosper in today's complex world" (my emphasis again).
Naturally he'd say that because since the AUD/USD was floated in 1983 it has been an important shock absorber which has stimulated and dampened growth as the economy needed.
But in the context of the current level of the Aussie in the 76/77 cent region it is worth reiterating what he said on Tuesday.
"The depreciation of the exchange rate since 2013 has also assisted the economy in its transition following the mining investment boom. An appreciating exchange rate would complicate this adjustment" Governor Lowe said.
That's central bank speak for 76 is better than 93, but we don't want it too much higher. It's also why Lowe noted last night it's hard to say the currency is "fundamentally too-high".
Bringing all back to the here and now that means the Aussie has support from the prospect of solid economic growth in Australia, the commodity and economic growth pick up globally, and last night reawakening of the Trump stock market rally.
That's why it found support at 76 cents.
Likewise the fact that the US dollar is consolidating rather than rallying, is another reason buyers remain happy to pick Aussie up on dips.
That's in no small part due to a real dichotomy of thinking about the US dollar. Most traders believe the fed's tightening cycle and Trumponomics will increase the appeal of the dollar and US assets. But they remain concerned of getting ahead of where president trump sees a 'fair" level for the USD.
That's tempering their enthusiasm. As is the possibility that at any time a random tweet from the president could reverse the dollars course.
Which is all by way of saying at present, and still, the Aussie dollar has some real positives, ones that can drive it to and above 80 cents this year. But for the moment the next shoe to drop is likely to come from the US dollar.
Looking at the technicals we see a clear support zone - the one I have been highlighting - in teh 0.7580/0.7600 region. A break would open a move toward 0.7480, perhaps lower. Topside the AUD/USD has to break 0.7720 to kick higher.
Have a great day's trading.
Greg McKenna