Originally published by AxiTrader
Key Takeaway
The Aussie dollar is under pressure as traders recognise the upside has failed and the downside is vulnerable.
So they pushed.
The fact the AUD/USD move was in keeping with the recent CAD weakness and overnight Kiwi fall suggests though this is very much a US dollar move.
What You Need To Know
One of the things about writing a daily note is that the noise that is daily moves sometimes makes it difficult to frame a narrative that is consistent through time.
Today is not one of those days when it comes to the Australian dollar.
I say that because even though I have been writing recently that the confluence of positives that are and have accrued to the Australian dollar recently are usually consistent with a strong Aussie, multiple failures above 77 cents and the clear message from the Fed that a rate hike this month is a real chance was a clear sign the AUD/USD was coming under downward pressure.
A handbrake as I characterised it yesterday.
But it was really only the technical outlook that suggested the Aussie dollar might come in for some heavy selling after yesterday's somewhat disappointing trade surplus - yes a surplus - of $1.1 billion saw the Aussie dip.
Indeed once the Aussie traded below 0.7650 I tweeted that it looked "tired"
The technical move I was looking for was a retracement to the low on February 2 when the Aussie shot up and through 76 cents. So I'm 50% out of the short I've been in for a couple of weeks now.
But from a bigger picture point of view, especially with all the positives, and me chatting about the chance of a run over 80 cents this year so often it is worth evaluating why the Aussie is under such pressure.
Put simply there are really just two reasons.
The first is 77 cents and the Australian dollar's inability to hold above it.
While the battle raged for almost 2 week's between the bulls buying dips near 0.7650/60 and the bears selling anything above 77 cents, the reality was that the price action reinforced the graveyard that prices above 77 have become for the past year.
So all the bears - and there are still plenty of them with the latest Reuters poll showing estimates for the AUD/USD are still around 73 cents by August - just needed an excuse to hit the sell button.
Which brings me to the second reason for Aussie dollar weakness.
Clearly that is the way in which the run of Fed speakers have materially moved the needle on market pricing for a rate hike this month from around 25% last Friday to just under 80% this morning (that's as measured by the CME FedWatch tool).
Now I believe the Fed speakers are genuine when they say that in moving now they won't have to move more aggressively at some later point. So tho that extent they are trying to signal the magnitude of policy divergence that will flow from their rate hike cycle will be relatively benign.
But people feel changes not levels. so the fact that the market hadn't really considered March "live" until the last few days is important for the US dollar and by definition
So the fact that the market hadn't really considered March "live" until the last few days is important for the US dollar and by definition every forex rate that is measured against the US dollar.
Hence the bears found their excuse to test support and sell the Aussie with the wind at their backs.
The big question is how far will the Aussie fall.
In general terms, the pullback from each rejection of 77 cents over the past 10 months or so appears to sat within a rough range of 200 to 600 points.
That's interesting given the 38.2% retracement of the 2017 rally comes in around 0.7512 - a little more than 200 points below the high for this year.
Could it fall further? Of course it could if the US dollar rally really gains traction. 0.7450 and 0.7380 aren't out of the question technically.
But if stocks stay elevated, and investors globally remain focussed on reflation and Trumponomics it would be reasonable to expect the Aussie to find buyers again once folks know this fall has stabilised.
Such a scenario would also suggest the fall in the Aussie crosses overnight is likely to draw in support at slightly lower levels as well.
Have a great day's trading.