Originally published by AxiTrader
Key Takeaway
For the past 16 hours the Australian dollar has found support just below 75 cents in the vicinity of 0.7490.
That bid tone appears to reflect a short-term market which is heavily oversold, but it likely also reflects the mild recovery in base metals overnight and some caution before non-farm payrolls tonight.
Structurally though, at least in a technical sense, it does look like Aussie dollar traders are still likely to push the currency lower as traders readjust their bets against the commodity bloc and emerging market commodity exporters.
What You Need To Know
The Australian dollar has lost another 0.3% in the past 24 hours and sits at 0.7505 as I write. That performance is in keeping with the fall in the Kiwi and a little bit worse than the Canadian dollar which has been under selling pressure for longer than the antipodean pair and who's weakness has now seen USD/CAD rise above 1.35.
If we add up the overnight moves in the key drivers of the AUD/USD though we can see why it stabilised.
Stocks in Europe and the US managed to finish in the black - so investor risk appetite is a mild positive. Base metals and iron ore prices rallied a little overnight although copper in the US was lower. The US dollar was mixed - weaker against the euro and pound, stronger against the yen and commodity currencies.
And probably the big one. While US rates are rising so too are Australian rates which are being dragged higher. So the spread is holding above 50 bps in the 2 year part of the curve. But it's under pressure and structurally that means the Australian dollar is as well.
I recall a time when I was wondering the world talking to investors about the Australian dollar when I was head of currency strategy at the NAB and the spread moved below 50 basis points. It wasn't good for the Aussie and the cries of "why would I bother" from bond investors rang loud and clear.
Are we on the cusp of Aussie dollar irrelevance once more as the Fed embarks on its tightening cycle and a bond market rout is at risk of beginning?
It very much depends on tonight's non-farm payrolls, what the Fed does next week, and where the US 10-year bond closes the week tonight.
In the mean time the 4 hour chart suggests a small rally today as long as the 0.7490 region holds.
But I generally trade in a longer timeframe and the daily chart is targetting 0.7468 as a Fibonacci extension of the selloff, rally back above 76 cents and then break.
Further support is in the 0.7430/50.
But the key really is non-farms and the Fed, and what that does to bonds and stocks.
Have a great day's trading.
Greg McKennafor.