Originally published by AxiTrader
The tug-o-war continues between the Australian dollar bulls and bears.
Having opened Asian trade a little firmer yesterday the Aussie traded up to a high of 0.7948ish on the back of a mildly weaker US dollar and substantially stronger iron ore prices in Asian trade. But like dragon fire the bears laid waste to the bulls in a few short hours chasing the AUD/USD back to a low around 0.7898.
As a result the Aussie is at 0.7912 and under a little pressure along with its commodity block cousins the kiwi and Canadian dollar.
The tug-o-war between bull and bear is as much a battle between the usual drivers of an Aussie dollar rally - commodity prices, investor sentiment, risk appetite, global growth, Australian growth - and the not inconsequential question of what exactly an Aussie dollar here at 79 cents or up above 80 cents would do to the Australian economy.
Already we know the RBA thinks these levels are a handbrake on growth. But equally, we know the RBA expects Australian growth to accelerate toward 3%. That's above potential and so likely to bring down unemployment and underemployment. That, in turn, should aid wage growth and inflation, which in turn should help drive inflation back inside the RBA's 2-3% target band.
And all that would in turn eventually lead to higher RBA rates.
So combining the domestic and international outlook with the recent rally in commodities it is easy to see the bulls case.
The bears on the other hand fret about the impact of an Aussie up here will have on growth. The bears worry commodity price rises - especially iron ore - will prove ephemeral, and they highlight the deviation of the AUD/USD from fair value models which are based on the prices of the very inputs that the make the bulls case.
Hence the tug of war up here. Both the bulls and the bears are right.
There is a strong fundamental case for a relatively strong Aussie up here near 80 cents. But there is an equally strong fundamental case the even with all the positives the AUD/USD is too high and at the upper end of the "valuation" band - and should fall as a result.
So like two fairly evenly matched teams struggling at either end of a rope the gains and losses for AUD/USD can be incremental as we see the ebb and flow of data and of course the US dollar.
That makes today's release of the NAB business survey and Chinese trade data of utmost importance for the Aussie.
Certainly many consider the NAB survey to be second tier in nature, but if there was only one data release each month I could view to judge the Australian economy it would be the NAB business survey.
At present conditions and confidence remain solid and above long run averages. Trading, profitability, and employment sub-indexes are also showing strength as well. The strength has been broad based.
A continuation of that trend will reinforce the message traders have garnered from recent data flow that the Australian economy is doing quite well in both absolute and relative, terms.
Chinese trade data is also an important bellwether for the Aussie because it influences opinion on growth in China, global growth, and the subsequent knock on impacts of both on Australia.
Key to watch are the growth rates of Exports and Imports which are expected to moderate a little from last month but not collapse.
Looking at the price action now and the Aussie currently remains on track to test lower levels. Rallies appear set to continue to be offered and 0.7875/80 remains the first target and then 0.7800/20. Here's the chart - regular readers know the set-up.
As you can see in the chart the AUD/USD is still holding above support which is a positive sign. Anything deeper than this will need a bigger turn in the US dollar at the moment.
Have a great day's trading.