Originally published by AxiTrader
Quick Recap
Traders are defying the pundits who believe the AUD/USD should be lower, or that its strength can't last, and have taken it back above 77 cents for the first New York close above that level since April's aborted run to 0.7820/30.
That there remains plenty of resistance - in trendline and Fibonacci terms - between 0.7710 and 0.7820/30 remains the case. But other than that traders will be asking themselves one question at the moment - why exactly should I sell the Australian dollar?
The answer that they should right here and now is a difficult one to justify
What You Need To Know
Over the past couple of weeks pundit after pundit has been issuing papers saying the Aussie dollar will break lower not higher. Yet during that time frame the Aussie dollar has found support on the crosses and against the US dollar it has found buyers at 75 cents and then again at 76 cents and now the buying has taken it to 77 cents.
This strength, and the buying it flows from, could of course prove ephemeral as it has multiple times this year. Indeed much of the negative punditry revolves around the belief that the rally in commodities can't continue and the Australian dollar will fall lower once again.
That may be as it is but the Aussie is more than just a commodity story. I like to distill the myriad of drivers into 5 keys groupings and in looking at these groupings it's harder to make the case I'd want to sell right now.
- Global Growth (and commodities)- it's not like the economy is in the pink of health but with the two biggest economies on the globe, China and the US, in relative health fears of another sharp slowdown have receded. Throw in the turn in the cycle for commodities that the reversal in the deterioration of growth, and production efforts, has lead to and that's a tick for the Aussie. Not forgetting the reflation trade as well if it takes hold.
- Interest rate differentials - the big move in Fed rates that the RBA and others thought would knock the Aussie lower hasn't happened and doesn't look like it is going to happen in a hurry. Sure long bonds are higher but with it looking like RBA governor Lowe is in no rush to cut, and with Aussie bonds rising with US bonds this is is not as negative for the Aussie as many thought. AAA rated, and relatively high rates - that's a tick for the Aussie.
- Investor sentiment (risk appetite) - Investors aren't exactly enamoured with the world at the moment. That's something the large levels of cash in institutional portfolios suggest. But fear gauges like the VIX aren't elevated either. Rather investors appear to inhabit a space where they are alert to danger but not alarmed by the outlook. That's half a tick for the Aussie.
- The US dollar - stronger but not super strong is the best way to describe the US dollar at the moment. That's a mild negative for the Aussie but the fact that its rally has stalled a little and that the reflation/commodity trade is helping the Aussie balances this out.
- Technicals - this is the only clear negative for the Aussie dollar on a daily basis. The level of resistance in the 0.7710-0.7720/30 region is phenomenal. Trendlines and Fibo's abound. There is a lot of wood to chop in this region.
Clearly if each of these 5 high level drivers of the Aussie were equally weighted you can see that it's hard to make a determination that the Aussie is a sell right here and now. But the bulls are wary and have been burnt many times in this zone during 2016 so they are wary.
But if you take a long view, look at the crash in prices for commodities this year as the end to that cycle, and if you look at a monthly chart of the Aussie it is possible to see a push through this tough resistance zone as eventually occurring and a run above 80 cents as the end result.
That remains my view longer term. But immediately I'm as wary as any other Aussie dollar bull right now - notwithstanding the overall positives that are accruing to the Aussie.
Have a great day's trading