Quick Recap
The Aussie dollar found a bid again last night which took it up to the recent range high once again. That sets up the tantalising prospect of a range break for the Aussie. But can break and what's next if it does?
What You Need To Know
Despite being almost as universally despised as the stock market rally the Australian dollar just keeps find an ever higher bid.
Earlier this year most pundits were forecasting the demise of the AUDUSD not just below 70 cents but in some cases toward 60 cents. Many of those views were predicated on weaker commodity prices and more recently it is increased expectations that the RBA will take interest rates in Australia down to 1%, perhaps below, which is fueling enduring bearishness.
Yet the Aussie dollar AUD/USD this morning is sitting at 0.7654, just a little over 20 pips below July's high.
Why is that so?
Last week I highlighted the Aussie's rally after the RBA rate cut. Indeed the Aussies rally was in spite of the RBA rate cut.
But in that note, I also highlighted a potential risk for the Aussie dollar from the potential compression of the Aussie 10 year bond rate and the US 10 year bond rate. That risk remains - but it is important to reiterate that it is a switch, like a digital option. So, while Aussie 10's are 10 or 20 points, let alone around 40 as they are at present, above US 10 year bond rates the Aussie remains well supported. This spread is even higher at a cash or 2 year bond point in the curve.
So rates are not a hand brake yet.
They, like the continued improvement in commodity prices since earlier this year remain a reason to buy the Australian dollar.
Throw in a rally in global stocks, improving investor risk appetite - even though many still despise the rally in the S&P 500 to new all-time highs - and you have a backdrop which remains conducive to Aussie dollar support. As evidenced by the current buying.
So where to now?
The $64 question is whether the Aussie, after defying the punditry, can break higher still. The fundamental answer right here and now with the current backdrop is yes.
Certainly weaker consumer confidence data today for Australia, along with the weaker than expected retail sales for June is a warning sign the economy might be slowing and the RBA will indeed need to cut rates further - puting pressure on the Aussie and the bond spread.
But for the moment commodities and global forces are winning the debate.
Technically it's a question of time frames.
My daily chart looks toppish. I don't have a sell signal, but I have been watching the recent range top closely. yet the technical breakout of the wedge is compelling. So if 0.7680 gives way the Aussie dollar can easily run toward the 0.7800/30 trendline resistance you can see in the weekly chart below.
0.7820/30 is then resistance as the year's high and roughly the 38.2% retracement of the 2014-16 selloff.
That level is likely to hold unless the Fed signals there is no chance of a rate hike.
Wrapping it up, the short term momentum is stalling unless the Aussie can conclusively break 0.7680 soon. If it does a strong surge toward 7800/30 could begin.
But it has to break first.
Have a great day's trading.
Greg McKenna
Chief Market Strategist AxiTrader
www.gregmckenna.com.au
The information provided here has been produced by third parties and does not reflect the opinion of AxiTrader. AxiTrader has reproduced the information without alteration or verification and does not represent that this material is accurate, current, or complete and it should not be relied upon as such. The Information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any particular trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted