Originally published by AxiTrader
The Australian dollar is only off around 0.4% from where it was at 7am Tuesday morning. But, at 0.7969, it has lost more than 70 points from yesterday's high around 0.8040/45.
That price action, the pullback from the highs, failure below the recent range top, and daily technical set up, point to the Aussie dollar needing to test lower levels in the days ahead.
But before I get to the price action I want to address what governor Lowe had to say yesterday in his statement after the RBA board decided to leave rates on hold.
The first thing to say is that he managed the balance between communicating the current situation and outlook versus the potential disruption to this outlook a big rally in the Aussie could cause perfectly.
Given not everyone will read my morning market wrap it's worth re-iterating what I said earlier about the governor's statement.
Governor Lowe reiterated Australia continues to face a positive economic outlook with “the central forecast is for the economy to grow at an annual rate of around 3 per cent”. That’s around where the RBA sees the potential growth rate for the economy which is why the RBA sees inflation and wages eventually rising again. Something he also reiterated.
But Governor Lowe also highlighted the handbrake the Australian dollar – if it rallies hard from here – would pose to that growth.
My take for forex markets was that the positives of the outlook slightly outweighed the possible negatives of a higher Aussie given it is the global backdrop, as well as the strength of the domestic economy, which is actually driving the Aussie dollar – along with US dollar weakness which the RBA cannot counterbalance effectively in an enduring manner.
Specifically, on the exchange rate governor Lowe said, “The Australian dollar has appreciated recently, partly reflecting a lower US dollar. The higher exchange rate is expected to contribute to subdued price pressures in the economy. It is also weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast”.
In other words, a higher Aussie dollar tightens financial conditions in the economy and acts as a de facto rate hike. So rates in Australia won’t be going up anytime soon.
I’d expect Friday’s SoMP to explore the risks to the economy stronger Aussie poses – which may be a risk to the outlook for the currency all other things equal.
But that's Friday morning. In the meantime, the technical set up suggests the Aussie is looking a little wobbly here below the recent highs.
As readers know my system went short on the initial break of 0.7955 last Friday night. What's important about that is that my system is, in essence, an exhaustion system. It's not built to be contrarian exactly, but it does pick up on moves which are getting stretched and at risk of reversal.
It does this in a combination of MACD's, Bollinger Bands, moving averages, and - when applicable - trendlines or Fibo levels. I then generate a buy or sell signal which I place in the market to be triggered by price action, or not as may be the case.
[Please note I have my own money and risk management protocols]
Anyway, I'm short at present and targeting a move back to 0.7906, then 0.7870/75. At this lower level I'll reassess whether a deeper move back to 78 cents is on the cards.
Here's the daily chart.
Worth noting however that on the shorter time frames, 1 and 4-hour charts - Friday's low at 0.7936 is the key.
Have a great day's trading.