Originally published by AxiTrader
Quick Recap
Forex markets are going to be all about central banks this week - the Bank of Japan and the Fed. And while the BoJ remains uncertain because of its "comprehensive review", and even though the Fed is expected to leave rates on hold, the risk of market instability is high.
That in itself is enough to weigh on the Australian dollar. But throw in a higher than expected US CPI and the Aussie has opened the week at 0.7475 just 30 points above last week's 3-month low, and under pressure.
What You Need To Know
The AUD/USD is sitting at 0.7475 this morning after trading a fairly benign 1 cent range last week of 0.7539-0.7439 all things considered.
All things considered because when you sum everything up for the Aussie it could have been a much weaker performance.
That's because the VIX, CBOE measurement of US stock market volatility, rose and held at its highest levels since the Brexit vote, long end rates across the globe rose, oil, gold, and other commodity markets were under pressure, and the US dollar was stronger across the board especially Friday night against the Pound, CAD, and Euro.
So while the Aussie at 0.7475 this morning is around 40 points lower than this time Friday when it was happily back above 75 cents it's actually a spectacularly strong performance.
The Aussie has even managed to defy the Kiwi parity party crowd with this little bit of strength and a climb of last week's low. It's back at 1.0306 this morning.
But the key outlook for the Aussie dollar revolves around the Fed and what it does, says, and of course how the markets react in the lead up too, and then aftermath, of these meetings.
To that end it's worth noting that the CPI release for August on Friday night reinforced to traders that even though the Fed is not expected to tighten this week it's still highly likely that we see what might be considered a hawkish pass. That is where rates a left on hold, we see a couple of dissenters to that motion, a strong statement suggesting a rate hike in December and a dot plot that suggests a series of rate hike in 2017 even if it's a shallow rate cycle overall.
My own view is the fed should take the opposite approach and conduct a dovish rate rise where they move policy up a notch but say it will be a shallow cycle. I believe they should do that to wrest back control from the markets. But I am one out on this so it's a very low probability.
To the Aussie dollar specifically and even though it's hanging tough there are some critical levels traders need to watch.
Naturally no move by the Fed and a dovish dot plot or stement will see the USD dollar undermined, risk appetite - and stocks - surge, bonds rally and the Australian dollar and other commodity currencies rise strongly.
That scenario would take the AUDUSD back toward 76 cents, perhaps 77.
But as you can see in the chart below there is a massive convergence of multiple trendlines in that region which have proved to solid for the Australian dollar to break in recent months. It would also require an incredibly dovish fed which would be entirely out of context for all but one speech we have heard in the past 5 or 6 weeks.
On the downside a break of last week's low of 0.7439 would open up a move toward the current uptrend support of 0.7359. In the lead up to that 0.7400/10 is support and if 0.7330 breaks the outlook turns to a test to 0.7100/50.
before we get to the Fed at 4am Wednesday morning we also have the Bank of Japan on Wednesday in our Asian session. I'll have a report out on that tomorrow morning.
Have a great day's trading.