Originally published by AxiTrader
The Australian dollar made a high around 0.7874 which was almost perfectly at the 61.8% retracement level of the 81-75 cent selloff from which the Aussie has bounced so strongly recently.
It's at 0.7862 this morning, still extremely strong as the combination of investor risk appetite and expectation about the global growth outlook combine to give traders previously worried about the outlook for the Aussie the resolve to stay long.
Likewise, the strength of iron ore, which gained as much as 6% in the first week of 2018 has also supported the Aussie and helped traders brush of concerns that might normally be raised by the slippage we saw in copper's price last week.
It's no surprise that the Aussie dollar should have a pretty solid relationship with the price moves in Australia's biggest export - iron ore. But what's interesting about the last week has been the divergence between copper's price and that of iron ore.
As I discussed with regard to the US dollar in late 2017 there is not always a unifying narrative in markets. And what's clear here, in this subtle divergence between iron ore and copper, is not that investors and traders are questioning the outlook for global growth (as the pullback of 10 cents a pound in copper futures might suggest). But rather it is copper specific features which are driving its price lower.
That doesn't mean I'm still not uncomfortable with the divergence between the short-term price action of copper and the AUD/USD rate. For me, it is still a warning that a sustainable topside break in the AUD/USD may be difficult right now.
But what iron ore's rise, when coupled with the ebullience in global stock markets and the associated positivity about global growth and investor risk appetite says is that the Aussie dollar remains well supported at the moment.
And this week the Aussie is likely to be driven by this positivity. But it's also likely to be driven by moves in the US dollar which made tentative signs of finding its feet on Friday night in the wake of the non-farm payrolls release.
As I wrote in Market's Morning earlier, US dollar bears had ample opportunity to belt the buck Friday yet the euro still held below – yes just – the 2017 high. That could be the first sign that after a strong surge into years end the bulls might be a little tired and a pullback could be in the offing. I’m reluctant to get too excited just yet given that a trend which emerged in late 2017 was of dollar strength Friday evaporating on Monday once Europe and the US re-entered the fray for the new week. But the run lower higher for the euro has been steep and relatively fast and also stalled just under last year’s highs.
So I’m on reversal watch for the euro and many other currencies including the Aussie dollar.
But if we do see the Aussie close above 0.7875/80 then a round trip move back to the 81 cent level becomes a reasonable expectation.
For the moment though the rally looks like it is stalling. I don't have a sell signal yet. But there is clear support in the 4-hour trendline the Aussie has been respecting recently and the overall uptrend from 75 cents which both converge in the 0.7830/40 region.
A break of 0.7830 would be a sign a retracement has begun.
US dollar moves, NAB business survey, and retail sales will all be important this week.
Here's the chart:
Have a great day's trading.