Originally published by AxiTrader
It's difficult to isolate the Australian dollar's weakness over the past few days other than to highlight that along with the New Zealand and Canadian dollars what used to be called the "commodity bloc" has come in for some special attention and what looks like catch up selling.
Now of course it's easy to say that the Aussie is lower because federal treasurer Scott Morrision is going to release the government's mid-year economic and fiscal outlook and the threat that poses to Australia's AAA rating. But the evidence of the pressure the Kiwi and the CAD to a lesser extent are also under suggests some part of the weakness is speculative selling and unwinding of positions as much as anything else.
That said however MYEFO is still an important event for forex traders because what it says about the outlook for economy and Australia's fiscal situation in the years ahead.
If I took a ride in my helicopter the best way to summarise where we are with the budget is that we have the push and pull, perhaps tug-of-war, between the slowdown in jobs and wages growth on the one hand and a big bounce back in national income via higher commodity prices and the terms of trade.
If that's the case then it would a bit pre-emptive for S&P to race to cut right now. A further 6 months to see how the global and Australian economy play out would seem to me to be a prudent amount of time to wait before a downgrade. A rush now would be unfortunate given the potentially paradigm shift the US and global economy face in the next 12 months.
That said however the market is still long AUD when it comes to the big speculators and the proxy I use via CFTC position data on US futures markets.
That means there could yet be a capitulation of the bulls which could drive the AUDUSD down to 0.7150 or below.
Before Trump's election I was saying the positives for the Aussie are lining up and traders were struggling to find reasons to sell. But the US dollar is the other side of the Aussie dollar in the same way it's the other side of the Euro, yen, Yuan, Kiwi, CAD, and so on.
At the moment it is the irresistible force in foreign exchange markets. The Australian dollar has outperformed some of the majors on the crosses. But the reality is unless or until the US dollar reverses the best teh Australian dollar can hope for is relative strength.
Looking at the charts the Aussie looks like it is biased back toward 0.7150. Perhaps even lower.
0.7250/60 could be support if the daily downtrend I've drawn - lime green - on teh chart has any relevance to traders. But it looks like an eventual test of 0.7150/60 is a real chance. If that level breaks folks will start talking about 0.6800/50.
Have a great day's trading