Originally published by AxiTrader
0.7772.
Not exactly strong but not exactly weak either. Or certainly not as weak as the Australian dollar could get if this tariff and trade spat turns into a tit-for-tat battle of wills between global leaders and their economies.
As I have written extensively in my Markets Morning piece today that is certainly a risk. Indeed it is a risk because in this increasingly nationalistic western democratic environment, aggressive posturing and retaliation to President Trump's proposed tariffs on steel and aluminum could play well with domestic audiences and at the ballot box.
It might not just be the US President trying to make America great again. He could be joined by President Xi, President Putin, Theresa May, and Angela Merkel, as sabre rattling turns to something more destructive for global trade and the economy.
That's certainly a chance, with comments from commerce secretary Wilbur Ross and tweets from President Trump over the weekend suggesting the US Administration is in no mood to back down.
Smoot-Hawley anyone?
What that would likely mean is a further increase in uncertainty, in volatility, and as a result an associated reduction in risk appetite.
That would not be a positive scenario for the Australian dollar. Indeed it would be a very negative scenario for the AUD/USD.
That is a strong chance.
But presently tempering that potential weakness in the AUD/USD is the fact that the US dollar is under pressure because of the President's move. The tariff announcement has taken the focus off Jerome Powell's positive expectations for US growth and what that suggested about the path of fed funds and US bond rates.
In fact, my sense is that as traders and investors worry about the potential negative impact of the US and global economy of a possible trade war, they may be recalibrating the path of the US economy and thus Fed funds.
Is it an overreaction? Certainly, if the President finds a way to walk this back a little. There is also a case to be made that this could be a negotiating tactic. But right now after Ross' comments and the President's tweets over the weekend, it doesn't feel that way.
So the US dollar is at risk of a full round trip back to 88.26 in US Dollar Index terms, 1.25+ in euro terms and 103.50 and below in USD/JPY terms.
The Aussie dollar against such a backdrop is likely to lose ground against the other majors because of the uncertainty and fall in risk appetite, but still gain against the US dollar.
The question is by how much.
My sense is that 0.7815/20 is an easy target based on the 4 hour and 1 day charts. Thursday's candlestick was a signal for a short upmove (on a two or three bar basis) and the 4 hour charts turned higher along with that recovery from the 0.7712ish low.
That level was a neat Fibonacci extension (138.2%) of the fall to 0.7758, recovery and then break lower once again. So it’s also a good place to bounce from. The RBA and GDP are going to be very important for the Aussie, so too the overall risk aversion/appetite situation this week.
But for now, the Aussie looks biased back toward at least 0.7815/20 initially. Then we'll see. Suport is 0.7712 and if that breaks its down toward 0.7615 which retains my ultimate target.
Here's the 4-hour chart.
Have a great day's trading.