Originally published by AxiTrader
Key Takeaway
The Australian dollar traded a relatively narrow range to open the week of just 40 pips. But that tight range belies a level of underlying disquiet the price action speaks to as the AUD/USD under performed its bigger rivals like the euro, yen, and sterling.
At 0.7622 the Aussie is largely unchanged while the big three have gained more than 0.6% against the US dollar in the first 24 hours of trade for the week. The Aussie has also underperformed the Mexican peso and Korean won both of which have also gained more than 0.6% against the US dollar in the so far this week.
It's not terminal of course - but the Aussie relative performance suggests that as one of the primary beneficiaries ion forex markets from market embrace of Trumponomics there is a rotation going on in markets right now.
What you Need To Know
Up until 2 weeks ago the Australian dollar had been the best performing of a basket of about 20 currencies I watch against the US dollar in 2017. But since failing to hold above 77 cents again last week currencies like the yen have caught up while the Korean won and Mexican peso have swiftly eclipsed the Aussie dollar's performance.
Why that could be the case is possibly best explained by a combination of two factors.
The first is that president Trump has in proved himself so far less effective president than many thought he would be. That meant the move in markets since the US presidential election - the one that specifically picked winners and losers across the broad spectrum of financial markets - has unwound to a certain extent.
Stocks have drifted lower, bond rates have rallied, and while the US dollar has been losing ground broadly those losses have been magnified against the Emerging Market currencies that were hammered in the wake of his victory.
The second factor is that there has been a growing recognition that even with the global economy showing real signs of economic life and reflation perhaps the bounce in commodity prices - especially Australia's export basket - might have fully factored all the good news. And then some.
And then some. Even the RBA has been warning about the outlook for commodity prices.
So the Aussie is experiencing a period of relative underperformance.
But it has still gained move against the US dollar this year than the euro and pound and is now level pegging with the yen which has caught a bid from the uncertainty trade over the past week.
Which brings me back to what I have been saying for a few days now - as iron ore and other – non-US dollar – drivers of the Australian dollar continue to undermine it so then does the AUD/USD remain pressured. It also means the Aussie will continue to underperform on the crosses.
That's especially the case if stocks continue to drift and traders and investors globally recalibrate their expectations for the stimulatory impact of Trumponomics and the delivery data of any tax cuts or infrastructure spend in the US.
So far it's only knocked the AUD/USD back a little more than a cent against the US dollar.
But I'm wondering, as the AUD/USD underperforms the other major traded currencies, if some switch hasn't already been triggered in investors minds. Another failure above 77 cents, an inability to capitalise on a weaker dollar, commodity prices drifting and a 10-year bond spread to the US which is back near multi-year lows and
Another failure above 77 cents, an inability to capitalise on a weaker dollar, commodity prices drifting, and a 10-year bond spread to the US which is back near multi-year lows and the support for the AUD/USD starts to erode.
It also means if the US dollar does find support and bounce the Aussie is likely to come under further pressure.
So to reiterate - when you look at the moves in the Won and Mexican peso, in gold, and bonds, the selling in US financial stocks, the dip in commodity prices, and the uptick in the VIX what we are seeing is a cross-market unwind of the core pillars of the Trumponomcs rally.
So far it's just been taking some money off the table. But it threatens the broader market and that in turn threatens the Aussie dollar.
Looking at the charts then the short term rally that was possible didn't eventuate past 0.7648 and the daily charts suggest the pressure remains for a test down toward the support line around 0.7570ish.
A break of that would open up a move toward 0.7490. But as I wrote yesterday. hat 0.7530/70 zone has been important support and resistance on multiple occasions across the past 10 months. It remains that again in the current environment.
Here's the chart:
Have a great day's trading