Originally published by AxiTrader
Quick Recap
The Australian dollar is up half a per cent this morning at 0.7401 against the US dollar as traders re-evaluate value in a world of a stronger US dollar driven by expectations of stronger growth, infrastructure spending and reflation.
Maybe traders are also buoyed by the very upbeat take on the economy from RBA assistant governor Chris Kent.
What You Need To Know
The RBA has on 4 occasions so far in November had an opportunity to give the market feedback on its view on the outlook for the economy. And on all 4 occasions it has been extremely positive on that outlook.
Sure the quarterly Statement on Monetary Policy and the Minutes to the November RBA board meeting both highlighted some uncertainty about weakness in the labour market, the switch to part time jobs, and underemployment. But their outlook on economic growth - which the minutes said would grow at potential in the next couple of years before accelerating above potential - and on the terms of trade increases persisting have been very positive.
So it was that RBA assistant governor Chris Kent took the rostrum at the Australian Business Economists dinner last night to give a breakdown of the banks view of the economy on a state by state basis.
Kent was very optimistic about growth. He said the drag on growth from the fall in mining investment was about "80 per cent" done and that even with massive tonnage "resource exports still have further to grow".
In the rest of the economy he said:
"Growth of activity in the non-mining sector has risen gradually over recent years. That improvement has been fostered by low interest rates and the depreciation of the exchange rate since 2013. Growth of non-mining economic activity is expected to be around average over the next two years."
Kent also highlighted the changing impact of the terms of trade.
"While our forecasts are uncertain and subject to various risks, the upward revision represents a marked change from the pattern of the past five years. Our assessment, based in part on liaison information, is that the improved outlook for commodity prices is not likely to lead to a noticeable pick-up in mining investment (in the near term at least). Even so, if our forecasts are right, the terms of trade will shift from the substantial headwind of recent years to a slight tail breeze providing some support to the growth of nominal demand" he said.
It all adds up to a fairly positive outlook for the economy. One which will "contribute to a rise in domestic inflationary pressures and a gradual return of inflation to more normal levels" Kent said.
That last comment is probably as important for the Aussie dollar as all that went before it. That's because Kent is tacitly suggesting that the RBA is closing the door on more rate cuts - which it only undertook this year because it was worried about inflation - and in the current environment that helps protect the Aussie dollar from the closing of the gap (spread) between Australian and US rates.
That spread - I like the 2's better than the 10's - has a strong directional impact on the AUDUSD exchange rate. Certainly it is one factor among many - which is why its a directional indicator not something that drives the Aussie in lockstep. But it is a veryimportant factor.
So to is growth and commodity prices.And to that end the continued, and persistent strength of metals and commodities broadly counterbalances the interest rate differential to a certain extent. Especially when a senior RBA official tacitly supports market pricing of RBA rate rises.
Technicals are also key - at least on a day to day basis. And to that end while I'm long from the low 73 cent region the question I ask myself everyday is what now. That's as true of any position as it is the Aussie.
Looking at the chart this morning my systematic approach has yet to get a signal to buy. That could come today I think though. But a garden variety Fibonacci retracement of the recent sell off wouold suggest a move back to 0.7488 - which is the 38.2% retracement level.
But to turn the outlook back to materially positive most traders would want to see the AUDUSD trade up and through the 200-day moving average at 0.7513.
Time will tell on that one.
Have a great day's trading