Originally published by AxiTrader
Key Takeaway
The seeds for the Australian dollar's rally Friday were sown in its resilience above, and ability to hold, 0.7490 the previous night. This gave bullish traders a level to push against and the Aussie rallied to a high around 0.7550 where it sits this morning.
While Aussie dollar support crystalised Thursday in New York the key to the recovery to these levels has been the US dollar's inability to capitalise on a very solid non-farm payrolls which almost guarantees a rate hike from the Fed after this week's FOMC meeting.
Some of that US weakness no doubt came from "sources" who suggested the ECB might be closer to raising rates than markets believe. But I wonder also if this week's G20 meeting and leaks about changed language around protectionist policies and currency levels hasn't also weighed on the US dollar. That naturally helps keep the Aussie elevated
What You Need To Know
The Australian dollar is opening the week on a much better footing than many would have expected after US non-farm payrolls printed better than expected 235,000 on Friday with the unemployment rate falling to 4.7% and the participation rate rose 0.1% to 63% - its best performance for 2 years.
If you'd have given that number and asked where I thought the Aussie, or yen, kiwi, or CAD, would be as we open this big week for markets I would not have said above 75 cents.
Certainly, as I wrote Friday the 4-hour charts suggested a rally in the AUD/USD - they still do to a certain extent.
But fundamentally with the Fed about to raise rates as the US economy approaches full employment and the Fed seems about to embark on the first of what is likely to be a series of rate hikes in 2017.
So the US dollar performance is both intriguing, and naturally important for the outlook for the Australian dollar.
That means the type of language the Fed uses when it raises rates this week is going to be very important.
Indeed I expect a fairly hawkish hike this week as opposed to the almost apologetic hikes we saw from the Fed in 2015 and 2016. Recall that Janet Yellen specifically said that 2017 is not either of these two years a couple of Friday’s back when she spoke. As the US moves toward full employment – if it’s not there now – and even if president Trump’s stimulus seems queued behind the repeal of Obama care the Fed seems to have coalesced around a view that it is for the economy to deny it the opportunity to normalise rates not the other way around.
But before we get to that announcement traders will be free to worry about the Fed, think about the rumours that say the ECB is closer to changing policy than it says - something I've been writing about for a while now - and also traders will be focussed on the G20 meeting this week.
It's clear that the US administration, or at least the Peter Navarro wing, which includes the president, sees the US dollar as part of the plan to make America great again. Not through a strong dollar of course - that would be counterproductive for someone - Navarro - who is fascinated by the impact that net exports has on US growth.
Rather with rumours floating that G20 will omit language about protectionism and commitment to free floating exchange rates the fear some traders will harbour is that Treasury secretary Mnuchin has joined the Navarro camp and in so doing may signal an end to the strong dollar policy.
That its only ever been a collection of words first articluated by Robert Rubin in the 1990's hasn't mattered. It's that the current administration may explicitly be walking away from the policy and may signal it wants a weaker policy.
That means the clash between the Fed and the Administration may be a complicating one for forex markets - and the Australian dollar this week.
Have a great day's trading.