Originally published by AxiTrader
The Australian dollar is up a little under 1.2% today, trading at 0.7565. That's a full 90 points higher over the past 24 hours.
To me the move stems from a market that is way overweight US dollars getting caught by the sterling reversal that spread across markets. It then morphed into an ex-poste fear that Donald Trump's comments over the weekend to the Wall Street Journal that a weak Chinese Yuan and strong dollar is "killing us".
So a little bit of a US dollar rout ensued and the Aussie caught a solid lift despite the carnage on metals markets and for iron ore and steel over the past 24 hours.
Thankfully I highlighted yesterday I was with Citibank in expecting the Aussie dollar to rally. But I confess to not having expected a 90 point surge on the day.
But explaining this is pretty easy really.
Put simply the market was vulnerable to a dollar reversal for two reasons.
First, a strong dollar was working against Donald Trump's plans to make America great again. As I've written many times last year and then already this week a strong dollar means that there is an inevitable leakage of US growth into the global economy because it is making other nations more competitive vis-a-vis the USA.
So there is a self-limiting impact of the dollar's rise if Donald trump is to achieve his goals.
Second, long dollar is a crowded trade and investors know that.
Take the latest Bank of America (NYSE:BAC) Merril Lynch survey of the big global fund managers as an example. Asked what they thought the most crowded trade on the planet is right now, the world's biggest institutional investors said the US dollar.
Here's the chart via a Tweet from Lady FOHF.
As you can see the view is that the trade is even more extended this month compared to last month.
So the setup was there for even the slightest ruction to cause an earthquake of US dollar selling and position unwinding. The question for me is whether the 3% rally in the pound, and 1% rally in the Aussie dollar is the start of this bigger, and deeper move lower for the US dollar.
USDJPY is at 112.63 this morning. That's just 60 points above the 112 target I talked about Monday as the lead on US dollar weakness. So I'm getting close to what I would say is the easy money in the dollar reversal being made. That, and the rout on base metals and iron ore markets means the Aussie dollar is starting to look a little extended where it is this morning.
The bollinger bands are super wide, and the Aussie is right at the top of the 2 standard deviation level - from the 20 day moving average. That normally suggests to me a period of consolidation. But my system has been long since below 72 cents and has not yet received a sell signal.
So with the 0.7518/40 region I highlighted Monday and Tuesday as the key being breached the little gallop that opens up is now possible. This region now acts as support with a target of 0.7620/40 and perhaps 0.7750/70 unless 0.7490 gives way.
Here's the chart:
Have a great day's trading