Originally published by AxiTrader
Since the Australian dollar collapsed on May 3 the subsequent kill zone for the bulls has been 0.7420/30 which has constrained rallies on four occasions in the past seven trading days.
A big part of that has been the continued pressure that it and other commodity currencies like the CAD and kiwi have been under recently. That pressure has resulted from weakness in both the prices and outlook for commodity prices as traders and investors recalibrate their expectations for Chinese growth.
Or, more correctly, not Chinese growth per se but the structure of Chinese growth.
Recently the PBOC has on a number of occasions declined to provide liquidity at the short end of the curve which has tightened liquidity and driven Chinese interest rates higher. That's been important in the rout in iron ore and other commodity prices.
Clearly also the relationship between tightening liquidity, rising Chinese interest rates, and the fall in iron ore extends to a relationship with the fall in the Australian dollar recently.
Investors are betting that as China tightens it is signalling a crackdown on the more speculative areas of the economy. They include some of the punters who were instrumental in driving commodity prices higher.
But a more important signal many see is that China, having locked down its capital account, is actually going after the more speculative areas of the economy including production and investment, as it seeks to transition toward a more consumer and service based economy.
Some support to that view appears to have been given by PBOC money market actions Friday. The bank declined to inject short-term cash rather offering medium-term money.
In many quarters that has been seen to support the view I've just articulated.
All of this means the release today of Chinese retail sales, industrial production, and urban investment data for March will be an important driver of the Aussie and other commodity currencies.
This data will tell us if the Aussie is going to challenge once more the 0.7420/30 region or again head back to test Fibonacci support in the 0.7330 region.
My system is long now. But that's our range and until one side breaks the Aussie is trapped.
Here's the chart:
Have a great day's trading.