Originally published by AxiTrader
After climbing to a high of 0.7718 yesterday the Australian dollar is lower again this morning sitting at 0.7661, down around 0.6%, after breaking below both trendline support and the 200-day moving average over the past 24 hours.
A large part of the selling over the past 24 hours has been the US dollar's surge after the dovish tilt taken by Mario Draghi and the ECB overnight. That move has seen significant levels in the US Dollar Index and euro break. And that, in turn, changes the narrative around the US dollar and its outlook.
That naturally puts downward pressure on the Aussie dollar.
But so do does the fall itself.
I say that because many commentators, forecasters, and strategists fought the AUD/USD rally, saying that it was above or at the upper edges of fair value. That didn't stop prices rallying of course - that's not what these models are about. But they do highlight the risks to the Aussie if key drivers start to move against it.
Already this week I've noted that the elevated level of positioning makes the AUD/USD extremely vulnerable to a capitulation. That risk has risen materially now that the Aussie has fallen down and through the 200 day moving average.
And of course with the outlook for the US dollar looking vastly improved, and with the Australian-US bond spread moving in the US dollar's favour the risks grow that the Aussie won't stop here at 0.7650.
Now, I'm naturally reticent to get too bearish when the Aussie has simply fallen back to one of the levels - 0.7650/60 - I'd highlighted over recent weeks. But it's worth noting that besides the BoE a number of the globes central banks have gone out of their way to contrast their outlook with that of the US Federal Reserve's tightening and tapering path.
Just this week we had the Bank of Canada wax dovish and last night Mario Draghi did the same. Australia's CPI report for Q3 this week did the same for the RBA - I'd argue Guy Debelle's speech last night reinforced that notion rates are on hold. The Kiwi is down in no small part because the focus on an employment piece in the mandate suggests a more dovish stance. And of course, the BoJ retains its uber-dovish bond buying stance.
Policy divergence folks. It's back and it matters.
So for Australia with questions about the outlook for Australian households, where there is slack in the labour market still, and where wages growth remains weak, the outlook is for an RBA to remain on hold for some time and differentials to move in the Fed's, and US dollar's favour.
To the charts and you can see a big break of trendline and moving average support on the dailies. That leaves the 0.7630 region as the last line of important Fibonacci support. It's a level which, if broken, would suggest the AUD/USD is going to "do a Kiwi" and fully retrace the to the start of the rally to 80 cents.
That would suggest a move to the 0.7330/70 zone. For me though I'm going to target 0.7500/20 and see how the Aussie looks there first. It's mino Fibo support and an area where we've seen resistance and support in the past.
On the day one and four hour charts suggest the AUD/USD could rally into the 0.7680/0.7700 region.
Have a great day's trading.