Originally published by AxiTrader
IT's been a wild ride for the Aussie dollar over the past week as it traded through a range of more than 200 points between 0.7772 and 0.7988 as the US dollar's fortunes ebbed and flowed.
The Aussie's low was in the brief period after the release of the US CPI had traders worried and buying dollars in the fear that the Fed would need to accelerate the pace of rate rises. That bonds didn't react seems to have been the key trigger for the US dollar's reversal and the bounce in the Australian dollar which took it to the high on Friday night.
That high was around the time that the euro was up around 1.2550/55 - a new high for 2018 and the highest level since December 2014. The reversal in AUD/USD was roughly synchronous the reversal in the euro and bounce in the US dollar.
So even though the AUD/EUR 35-day price correlation has dropped below 0.60 over the past week it is still true to say that where the US dollar heads is still going to be an important macro influence on the Aussie dollar. That's natural, it is the other side of the cross after all.
And that means we really need to think about what the US dollar is going to do if we are to distill the Aussie's direction over the week ahead.
Don't get me wrong, the release of the minutes to the last RBA board meeting tomorrow will be important. And RBA Governor Lowe has elevated Wednesday's release of the Wage Price Index into the pantheon of economic releases given wages are a key input into his - and the banks - outlook for consumers and thus the economy.
But, assuming forecasters are close in their estimation of a 0.5% quarterly increase and 2.2% year on year rate of wages growth it is the US dollar, and whether this Friday recovery was an oasis or mirage which will determine where the Aussie dollar heads across the course of the week.
And that is a double whammy for the Aussie given much - probably most - of this move up and down since mid-December has come from the US dollar side of the cross. What's doubly important about that is the feedback loop of a stronger (or weaker) US dollar on commodity prices which will then, in turn, weigh (or support) on the AUD/USD.
So on that front it is worth reiterating what I said in Markets Morning about the US dollar. The key reversal, and the not perfect but close double bottom above 88 might be a sign that the outlook has turned. Indeed if the US bond market can get through all the issuance this week with rates flat to lower we may see the US dollar higher. BUT again all I can say so far as this is a hiatus in what is an otherwise still strong US dollar downtrend. I’d still need to see 91 give way topside for the US Dollar Index to be confident that a bigger bounce was occurring.
And that means the characterisation of the Australian dollar move is that it failed at the 61.8% level of the down move before falling back to the 0.7890 regions on Friday night. That is the key zone I highlighted last Friday - 0.87890/0.7990 - and for me it is important in the week ahead. A topside break would suggest a move back above 81 cents.
But a break lower seems more possible. Should that happen then the Aussie is headed back toward 0.7850, and then 0.7780/0.7800.
Here's the daily chart:
Have a great day's trading.