Originally published by AxiTrader
The Australian dollar is sitting at 0.7983 this morning having recovered from Friday's low of 0.7936. That is after the US dollar weakened again in the wake of a solid - but not strong enough to surprise - print for US Q2 GDP which printed 2.6%.
But even though the Aussie is stronger it has lagged the big rallies in the euro, yen, pound, and Canadian dollar, which has seen these pairs head back to their highs of last week against the US dollar.
No doubt that lag is a result of genuine concerns held by forex traders that the RBA will amp up its rhetoric this week - in the wake of the recent surge in the Aussie dollar - in an attempt to jawbone the currency lower.
No doubt this lag in the moves of other majors also reflects traders in currency markets know that the rally in the Aussie dollar, and in TWI terms, will actually act as a handbrake on the Australian economy, and economic growth, in the quarters and years ahead if the strength is maintained.
That would materially impact the outlook for RBA interest rates - and any prospect that rates will rise in 2018 - and in doing so undermine the Aussie dollar's rally.
Looking at the RBA this week, we have the interest rate decision tomorrow, governor's statement, and then Friday’s quarterly Statement on Monetary Policy. No one really expects the RBA to move rates. But it is fair to expect – especially after Friday’s weakness in the US dollar – that governor Lowe will harden up his language around the impact of a higher Australian dollar on the economy in the year, years, ahead.
Perhaps something like “the rally in the exchange rate is complicating the economic adjustment and if sustained will negatively impact on growth in the year ahead”. I’d expect a broader discussion of the impact of the higher Aussie – in TWI as well as US dollar terms - in the SoMP Friday.
Should governor Lowe pass on this opportunity to jawbone the Aussie expect it to roar back to and through last week’s highs around 80.50 cents against the US dollar.
On the day the release of Chinese PMI's are likely to be a key determinant of AUD/USD, and cross, direction when they are released later in trading.
Looking at the price action now my system has me short on Friday's move below 0.7955. Usual risk management protocols are in place.
A long look back at the Aussie shows this 80 cents to 81.75 cent region has been an important inflection point for the Aussie over the last 20 years or so.
Closer at hand, looking at the dailies, the slope of the rally, the angle, accelerated over the past 2 weeks before last week's high around 0.8060/70. Under such conditions, it would be usual for prices to consolidate either in time or price before making a run higher.
It's not just that I am justifying my system being short. It's a systematic approach based on price action I've been using for years. My system as an edge in aggregate. But as usual every trade is not a winner. That said, the patterns on which the system is built are also the patterns I see before me know.
So I am cautious on the Aussie right here and now. A break of 0.7930 is however needed to get traders focused on the downside I'd bet.
Here's the daily chart.
Have a great day's trading.