Originally published by AxiTrader
The Australian dollar traded up to 81 cents because of the perfect convergence of exuberance about the outlook for global growth and increased positivity about what that would mean for the Australian economy.
But even though the global backdrop was, and remains, incredibly supportive of the Australian dollar the reality is that the run to 81 cents could not have happened recently without the collapse of the US dollar.
That's because as the other side of the AUD/USD exchange rate a weaker US dollar naturally means AUD/USD will rise.
Equally, as the "growth proxy" of global currency trade the Aussie also ebbs and flows with moves in commodity prices. And as commodity prices are mostly denominated in US dollars a falling "Buck" translates into higher prices - all other things equal.
That's the perfect sunshine under which the Aussie was able to rise.
But as we saw in overnight trade where the US dollar gained both the Aussie and commodity prices came under heavy pressure.
AUD/USD itself is down 1.1% at 0.7817, crude oil has lost around 3%m, copper the same amount while the rest of the base metals complex is also lower. Iron ore seems to have bucked the trend a little. But on balance, the positive feedback loop of a weaker dollar driving higher commodities and higher Aussie appears to be reversing.
Indeed the outperformance of metals and mining shares to the total market cap of world stocks has begun to reverse in the past couple of weeks as well. That's another sign that the worm has turned for the Aussie.
So while I have certainly over-egged it with the headline of a perfect storm. The reality is that this combination of a stronger US dollar continues to put downward pressure on the Aussie directly against the US dollar and potentially on the crosses.
Of course, as I wrote in Market's Morning earlier the US dollar would have to get up and through 91 in DXY terms, or down through 1.2222 against the euro, to convince me the turn is more than just a test back to the 38.2% retracements that these levels represent.
Turning to the Aussie dollar directly it seems clear the 61.8% retracement of the rally from 75 to 81 cents and 200 day moving average around 0.7740/50 is likely to be tested soon. And if that level breaks the bears will fairly roar.
I’m short and have been since above 80 cents last week. I’ve taken profit on two-thirds of my position as its fallen and have the 0.7740 level penciled in as the real next test. 0.7800/10 is very important as well given it was where the assault on 81 cents was launched from in early January.
The low of 0.7816 overnight suggests traders are eyeing that support. But it looks like a market were - as with yesterday morning's run to 79 cents - rallies are being sold.
Here's the chart:
On the day while 78 cents hold there is a chance of a break toward 0.7860/80 but that is likely to be offered.
Watch for Chinese data and a speech from RBA governor Lowe today as the key drivers.
Have a great day's trading.