Originally published by AxiTrader
You know it's unlikely to have been a good night for the Australian dollar when you see stocks in the US collapsing in the last couple of hours of trade.
That's doubly so if the yen is bid, gold is doing better than it should, and everyone is talking about Jerome Powell and rate hikes, but US 10-year bonds are lower.
And that is exactly where we are this morning as the Australian dollar sits at 0.7767, not far off the recent range lows and the level that could precipitate a swift collapse to 0.7615.
The big question naturally is whether the weakness into the close was month end shenanigans or whether the weakness we've seen in the past two days might be the end of the second wave of what might be a bigger downdraft for stocks.
Personally, I'm in the second camp. And while I'm not going to claim the Aussie dollar is usually driven by the daily or weekly machinations of the S&P 500, it is true that investor sentiment, risk appetite, is important for a growth proxy currency - and off index bet - like the Aussie dollar.
Indeed, as I write often, no exchange rate is the result of a single factor model.
But in the current environment where global risk aversion is rising and falling with stocks what happens in this market is important for the AUD/USD.
That's especially true with the 2 and 10-year spreads between Australian and US bonds so heavily in negative territory and thus offering no reason to hold Aussie unless it's for capital gains via either a big fall in yields, or more likely, increase in the value of the AUD/USD.
So as the US dollar marches slowly, but steadily, higher off the recent double bottom this also acts as a weight on the Aussie.
CapEx for Q4 today, and especially the latest read on the prospects for this and the next financial year are going to be important - more so than usual - in the current environment.
Looking at the charts and not much has changed from what I wrote yesterday morning.
"I don't hold out a lot of hope for the AUD/USD to be able to hold any rallies we may see back above 78 cents. Indeed my focus is on a test and break of 0.7850/58 and then a run toward 76 cents. "
Yup. Here's the latest chart.
Have a great day's trading.