Originally published by AxiTrader
The Australian dollar is a risk currency. People trade it for many reasons. Yesterday's fall to a low around 0.7854 and subsequent recovery to 0.7884 this morning is a case in point.
Risk went off after President Trump's "fire and fury" comment was met with an equally belligerent threat from the North Koreans that they might be looking to target US military bases on the island of Guam.
So as risk goes so goes the Aussie.
Most folks who read this column will be aware of this, but let me explain the mechanism through which the Aussie can often reflect risk appetite or risk aversion - as may be the case.
For much of its post-float life since 1983, the AUD/USD has traded as a proxy for global, and more recently Chinese, growth. Indeed former Fed chairman Alan Greenspan once remarked that if he wanted to know how global growth was traveling he looked at the Australian dollar.
That's not to say that Australia, or Australian settings - growth, monetary policy, commodity prices - aren't important. Clearly they are.
But the reality is that many traders use the Aussie dollar to reflect their outlook on global growth and that means the Aussie is often prone to buying and selling on the basis of investor and traders risk appetite.
One big reason for this is that the AUD/USD is a very deep and liquid currency. It trades 24 hours a day and offers liquidity for traders and investors to express their view without too much slippage.
So yesterday's selling pressure originated pretty much at the same time that US stock futures opened down. The Aussie then stabilised when futures stabilised.
Now of course this correlation is not consistent on any average minute, day, or week. But at times when traders universally want to hit the sell button the AUD/USD button is one of the ones they usually hit.
And as markets walked back from the worst of their fears. Or correctly put, US Secretary of State Rex Tillerson tried to walk the US back from what appeared to be a red line, markets - and the AUD/USD - began to recover.
Tillerson said of the "fire and fury" comment that "What the President is doing is sending a strong message to North Korea in language that Kim Jong Un would understand, because he doesn’t seem to understand diplomatic language".
That seems to have been an important circuit breaker overnight and it has helped the Aussie dollar.
So what's next?
AUD/JPY was under intense selling pressure yesterday down around 1% at one point and making a low of 86.28. This is often the Australian dollar cross which best reflects investor appetite - both good and bad. It's back at 86.73 this morning and a little outside the bottom of the Bollinger Band on the dailies. So it may find support.
But if the low in AUD/JPY doesn't hold it would be a sign AUD/USD, and other crosses, will be under pressure again.
Looking at the AUD/USD specifically, it still has a downside bias on the daily charts. At least the way look at them. That said the 4-hours were oversold at the lows yesterday, outside the Bolly Bands, and a sign for those traders in this or lower time frames that a bounce was on the cards.
The 4-hours suggest a move to 0.7911 is possible. But there is a little trend line there that should cap - or not as may be the case. It would be a powerful message either way.
On the dailies, the bounce from the low is a sign that perhaps the downtrend needs a rest. Fundamentally readers know the strength of the Aussie economy has been a key area of support.
But as noted above my outlook is still for a downside test toward the slow moving average which comes in around 0.7832 today.
Have a great day's trading.