Originally published by AxiTrader
The Australian dollar has had a pretty good night considering the support the US dollar received from New York Fed president Bill Dudley overnight. That's helped the Aussie make gains on the crosses even though its back - just a little - under 76 cents against the US dollar this morning.
Three things are key to this relative out performance for the Australian dollar this morning.
The overall risk-on tone of markets - as a result of a strong bounce in the Nasdaq and record highs for the Dow Jones Industrial Average and S&P 500 overnight - is usually associated with an environment where investors look more favourably on the Aussie dollar.
Indeed risk appetite, or investor sentiment, is one of the 5 key drivers in my Australian dollar valuation framework.
That's important because while Bill Dudley reinforced that the Fed will be raising rates as wages grow and inflation comes back that can actually be read as a good story for stocks as growth continues.
Perhaps more interesting for stocks and investor risk appetite was Dudley comments about the expansion. He said he is “very confident" the expansion “has quite a long ways to go.”
No wonder stocks weren’t worried.
Equally important this morning for the Aussie has been the continued out performance of Australia's economic data flow. That's both relative to consensus and other countries. That reality got a fillip from RBA governor Lowe who yesterday himself reaffirmed the outlook for growth in Australia.
At the ANU Lowe said (my emphasis):
"In Australia, it is likely that growth over the next couple of years will be a bit stronger than it has been recently.
The pick-up in the global economy is helping us. The return of mining investment to more normal levels is almost complete. Monetary policy continues to provide support and survey-based measures of business conditions have improved noticeably. Employment growth has also strengthened over recent months. These are all positive developments.
We do, though, continue to face some headwinds. Households are gradually coming to grips with slower growth in their real incomes. Growth in wages is unusually low, average hours worked have declined and the nature of employment is changing. So there is a recalibration of expectations going on. Many households are also coming to grips with higher debt levels and, in our largest cities, high housing prices. We need to watch these issues carefully."
Clearly he is expecting the growth pickup the RBA has been forecasting while also watching households spending and consumption intentions closely. That's something that readers know really worries me too.
But in reaffirming the outlook he's reaffirmed that rates won't change anytime soon here in Australia. Today's RBA board minutes should also provide support.
The final leg on the stool over the past 24 hours has been the lift in Chinese commodity markets yesterday after news broke that maybe Chinese authorities are going to relax restrictions on Wealth Management Products - part of China's massive shadow banking system - investments in commodities.
That saw a nice rally in base metals, rebar, and iron ore which added a little support to the Aussie.
You'll notice I didn't mention the Moody's announcement to downgrade Australian banks. That because while the Aussie fell on that announcement buyers came back in and bank ADR's in New York weren't under too much pressure. So forex traders just carried on.
All that said though I continue to see the US dollar as setting up for a technical bounce which will weigh on the AUD/USD and other majors. But if the current environment persists the Aussie should do better on the crosses.
Both AUD/JPY and EUR/AUD appear to be testing/breaking important levels at 84.77 and 1.4676 respectively this morning.
Looking at the AUD/USD chart it is clear the current range persists with 0.7635/40 resistance and 0.7560/66 support before 0.7515/20 comes into play.
The high really needs to break if the Aussie is to avoid a fall back toward the lower level of support. Here's the AUD/USD chart:
Have a great day's trading.