Originally published by AxiTrader
Key Takeaway
The Australian dollar traded to a high of 0.7699 after Australia's blow-out GDP report for Q4 of 1.1% and the acceleration of year on year growth to 2.4%.
The fact it can't rally up, through, or hold above 77 cents is easily explained by the increase in warnings from Fed speakers that there is a real chance of a rate hike at this month's FOMC meeting. That's seen interest rates markets reprice the chance of such a move.
That's a handbrake on the AUD/USD.
But the backdrop for the Aussie dollar broadly remains very positive. And traders still want to be long it seems. So they are expressing their bullish Aussie view by seeking to abstract the outlook for the US dollar and the Fed. And that is driving the Aussie dollar crosses higher.
What You Need To Know
The thing I love most about currencies, other than they are the ultimate macro markets, is that every price, and every trade, is a relative one.
That is when I buy or sell Aussie, euro, yen, sterling, or the Chinese yuan I have to sell something else. For the most part - in close to 90% of all currency transaction according to the last BIS survey of foreign exchange markets - it's the US dollar on the other side of that transaction.
But the beauty of foreign exchange markets is that there are also plenty of extremely liquid direct cross rates like EUR/GBP, EUR/JPY, GBP/JPY, AUD/JPY...the list goes on. Also the mechanics of the way foreign exchange works is that any cross can be generated by taking two separate positions against the US dollar which can synthetically abstract the US dollar from the cross that has been created.
That's important because often in trading and investing trends, opportunities and views on the outlook between two nations and their currencies pop up. It's equally important because sometimes a trader or investors simply wants to take the US dollar out of the equation to express a view on an underlying currency move.
That appears to be what traders are now doing when it comes to the Australian dollar.
While the AUD/USD has recently been trapped in a 0.7600/0.7740 range with the bulls continually being chased back above that 77 cents region there is evidence in the rally in the Aussie crosses that overall bullishness is being held toward the Aussie and has been expressed strongly in recent days as the AUD crosses made solid gains.
So over the past 24 hours while the Australian dollar has gained 0.22% against the US dollar it is 1.12% higher against the yen, 0.93% stronger against the kiwi, up 0.55% against the euro and Canadian dollar, and has risen 0.99% against the pound which itself (along with the Yen) is under pressure.
For the AUD/JPY in particular, as I noted yesterday, it both bounced off trendline support but had been looking vulnerable. But as I also highlighted there seemed to be a good relationship between the move in AUD/JPY and the rally in US stocks (as exemplified by the S&P 500).
And that's the point. The current environment we are in has always historically proved supportive of the Australian dollar.
The current environment we are in has always historically proved supportive of the Australian dollar. That is, reflating growth and inflation, a surge in investor risk appetite, strong Australian growth, an RBA not in a hurry to ease, and strong commodity prices all recommend the Aussie to traders and investors. It's just that as the other side of the AUD/USD cross what the Fed says it might do, and US dollar
It's just that as the other side of the AUD/USD cross what the Fed says it might do, and US dollar does as a result, are also important. That combination is currently a handbrake on AUD/USD which is driving traders to the crosses.
Looking at the charts for AUD/USD directly after yesterday's price action leaves the outlook a little clouded. We have seen a positive day with a higher high and lower low than the previous day.
That would normally be bullish. But it's also a warning that resistance above 77 cents remains strong and prices failed to break back up through the little trend it broke out of two days ago.
So my system is still short. But support above the slow moving average at 0.7633 held again last night. So It's not uber bearish either.
Here's the chart.
Have a great day's trading.