Originally published by AxiTrader
The rout in iron ore and Shanghai metals yesterday combined with an RBA governor I think you can read as even handed not hawkish coalesced into heavy Australian dollar selling over the past 24 hours.
At 0.7932 the Aussie dollar is 170 points below the high it hit in the wake of the initial reaction to the Fed's decision yesterday morning.
The easy money on explaining the move is that it's a reaction to the heavy selling on metals, steel and iron ore yesterday. What it looks like to me when I look at the hourly chart is that the Aussie was under pressure from the push back by the US dollar in the post-FOMC trade and then once metals and iron ore markets kicked off the bears used it as an excuse to hammer the Aussie lower.
Aussie dollar, Rebar, Iron Ore futures, and the DXY
But, as I wrote in my overnight Markets Wrap I think governor Lowe's warning on household debt and its impact on consumption was less hawkish than many have suggested.
I might be drawing a long bow but he said when discussing the normalisation of global interest rates "periods of rising interest rates globally have, historically, exposed over-borrowing somewhere in the global system".
Australian households maybe?
But what's important for the Aussie dollar was how he said the transmission mechanism of global rates would - or wouldn't as may be the case - flow to to Australia.
"A rise in global interest rates has no automatic implications for us here in Australia. Notwithstanding this, an increase in global interest rates would, over time, be expected to flow through to us, just as the lower interest rates have. Our flexible exchange rate though gives us considerable independence regarding the timing as to when this might happen" governor Lowe said.
If I unpack that, two things become clear.
First he is saying that the trend to global rates will impact Australia but not necessarily straight away. Australian rates just didn't fall as far as other nations so he can afford to wait and be patient.
But it's the second point which is key for the Aussie dollar.
My interpretation of this paragraph in Lowe's speech is he is saying the RBA might resist the trend to higher rates for as long as it can in order to encourage the Aussie dollar to fall. A counter argument is he could be saying if the Aussie dollar rises he won't need to raise rates.
Either way though, he was warning interest rate markets - and by extension forex traders - not to get ahead of themselves when it comes to pricing RBA rate hikes. And I reckon forex traders didn't miss his meaning - the Aussie still above 80 cents at 3pm, before Lowe spoke, and before it collapsed.
Anyway to the charts.
A double top above 81 cents. A break of the little uptrend line. And the chances of a garden variety pullback to the 38.2% retracement level of the rally from under 74 cents looks high.
That level is 0.7836. So I've penciled in a move to this 0.7836/50 region. 0.7954 is resistance.
Have a great day's trading.