Originally published by AxiTrader
Quick Recap
The Australian dollar opens the week on the front foot back at 0.7565 but still 50 points below Friday's post-non farm payriolls high around 0.7615. That leaves the AUDUSD mid range in the past fortnight's 2 cent range.
It sets up a big week's trade with plenty of data and event catalysts.
What You Need To Know
The Australian dollar has in many ways been the darling of forex markets for much of 2016. That may sound strange given so many pundits were forecasting the Aussie dollar's collapse in 2016. But it is the Aussie's ability to withstand the doomsayers and
That may sound strange given so many pundits were forecasting the Aussie dollar's collapse in 2016. But it is the Aussie's ability to withstand the doomsayers and push higher against the weight of sentiment and selling earlier this year which gives it that status.
Of course the positives that accrued to the Aussie are well known:
- Australia has a AAA credit rating;
- Australia has the highest cash rate and 10 year bond rate for nations with that status;
- Australia's commodity basket collapsed, but then has recovered strongly in 2016;
- Australia growth is somehow levitating around 3% in real terms, a phenomenal performance; and
- TINA - there is no alternative (besides maybe New Zealand)
These factors, and a market caught structurally short earlier this year, helped drive the Aussie up to important technical support at 0.7800/20 where it failed before collapsing, regained its footing and then pushed above 77 cents again recently.
So we've had a collapse, a very strong recovery, another big drop, and then recovery. All of which has brought the Aussie dollar to the mid 76 region in what is a massive week for local forex traders.
Data To Show Economic Weakness?
Last week the release of retail sales showed not increase in July sales against expectations of an increase of 0.3% for the month. That weakness was led by NSW and Victoria which were the only two states where sales fell on the month.
So it's no surprise then that Business Insider reports this morning that half of NSW mortgagors are concerned about making their repayments. Taken together these two bits of information suggest consumers, and households, might be struggling a little at present even though rates in Australia are at all time lows.
Data this morning seems to confirm this more pessimistic outlook for the Australian economy.
My colleague David Scutt from Business Insider reports that Australia's giant services sector just suddenly stalled. Scutty reports after last week's big fall in the Ai Group’s manufacturing PMI plummeted 9.5 points to 46.9 the Performance of Services Index (PSI) plunged 8.9 points to 45.0 for the month, marking the lowest reading since November 2014.
Yuk.
Is this data a precursor of a weak GDP to be released Wednesday?
Possibly not because the weakness we have seen recently has been for the current quarter - Q3 - not the to be reported Q2 data we'll see Wednesday. Already the market has a relatively benign expectation of just 0.4%. But because of previous strength that will see the year on year growth rate accelerate marginally to 3.2% - before revisions - if the quarterly data is realised.
So perhaps GDP is less of a risk than the coincident data being released presently.
But that change in the data flow may represent a challenge for RBA governor Glenn Stevens last statement, to be released at 2.30pm AEST Tuesday, before he retires.
No one expects the RBA to cut rates tomorrow. No one really expects a substantive change in the outlook from the RBA governor in his statement. Most prognosticators believe the decks were cleared with the August rate cut to give incoming governor Phil Lowe clear air.
But the rapid pace of the data deterioration could speed up the transition.
So What Do The Charts Say For AUDUSD
My raw reading of the weekly chart above is that the Aussie dollar has further to fall - toward 0.7400/35.
Looking at the daily chart suggests an overall downtrend but that the AUDUSD is currently mid range. That suggests any rallies toward 0.7615/35 will find selling with 0.7680/90 sellers lurking as well.
The daily target accords with the weekly target.
And of course the outlook for the US dollar remains important as well.
While economic weakness in Australia could reignite expectations that the RBA will need to cut rates to 1% it is the US dollar, and the fed, which is what can drive it out and below the current uptrend from the lows of the year.
I'm in the camp that says the Fed is still more likely than not to hike rates in September. Contentious as I know that is that seems the signal the Fed is still trying to convey.
It's also might be the catalyst for the next big dip for the Aussie dollar.
Have a great day's trading
Greg McKenna
Chief Market Strategist AxiTrader