Originally published by AxiTrader
I wasn't allowed to do any work when I was on holiday's on Nusa Lembongan over the past two weeks as my wife enforced a strict no laptop rule to make me disconnect. But the beauty of smart phones is you can sneak a bit of a look every now and again.
And I confess to being really surprised that the Australian dollar did so well against the US dollar and on the crosses - in TWI terms - while I was away. To see it not only break the 2017 high, the 2016 high, and then to head so close to 80 cents last week was an impressive move.
Now I won't claim to be able to add a lot of colour after the fact on what you already know about the Aussie dollar's move. But what I will say is that the moves in forex markets look very much to me like a simple path of least resistance move as traders capitulated on the US dollar and Trumponomics positivity.
Regular readers will recall when I last wrote about the Aussie dollar - the Wednesday after the RBA board meting - I said:
"It really does appear that Aussie dollar bulls bought the notion that we are in the midst of a global push by central bankers to co-ordinated a more hawkish message on monetary policy. That's the only conclusion I can draw from the price action that we saw after 2.30pm yesterday when RBA governor Lowe delivered not the uber-hawkish statement that would fit the co-ordination narrative but rather took an even handed positive but cautious approach to the outlook for the Australian economy."
But with the benefit of hindsight I see now that it was also a sign that the market was in tune with the resilience in the local data flow and economy and sensed a change in the outlook.
So it's no surprise that US dollar weakness and a discussion of the level of the neutral rate reflected in the RBA's minutes to the July meeting set the bulls running like it was a Pamplona street.
Equally though, while I was away both the NAB business survey and the jobs report confirmed the economies swoon in April May is behind us and the economy is back on a reasonably solid footing. This contributed to the bullishness as well.
But 80 cents is an overreaction RBA deputy governor Guy Debelle pointed out on Friday. That's because just as rates in Australia didn’t need to go as low as they did in other nations so – as policy rates normalise globally – Australian rates are not under the same pressure to rise as they are elsewhere.
Debelle also said that, “No significance should be read into the fact the neutral rate was discussed at this particular meeting, Most meetings, the board allocates some time to discussing a policy-relevant issue in more detail, and on this occasion it was the neutral rate.”
Indeed the very fact that the neutral rate’s fall to 3.5% has been discussed is a significant signal about the path of rates when the RBA does in fact decide it needs to raise them again in the future. It means a lower amplitude of the rate cycle and likely a slower pace of rate hikes.
I'd argue that most notably Debelle also said the Aussie dollar's rise IS - not would or might but IS - complicating the economic transition and the outlook for the economy. Not to mention inflation - $1 a litre petrol anyone?
That means this week is a big week for the Aussie dollar. We get the release of Q2 CPI for Australia, a speech from RBA governor Phil Lowe, and of course the FOMC meeting, decision, and statement.
The first two I'd expect to reinforce the Aussie is a little too high given the RBA's outlook for inflation and the economy. But in many ways it is the FOMC which has the power to determine whether or not the AUD/USD is ready to breach and hold above 80 cents or whether it is time to turn tail and head lower once again.
I say that because the fed has suggested the weak spot in the US economy was "transitory". The data suggests that's not the case. No change in rates is expected, and there is no press conference or dot plots. So the statement is key.
Looking now at the price action and I'd say that Thursday and Friday's candles are suggesting the AUD/USD is forming a top. It is important to note I don't have a sell signal yet on my system. So this is the suggestion of a top only - recall the Canadian dollar's recent move.
A break of Friday's low at 0.7874 would be an indication that a deeper move is afoot with 0.7828 the 38.2% - garden variety retracement level - of the rally to last week's high.
Here's the chart:
Have a great day's trading.