Originally published by AxiTrader
Key Takeaway
The Australian dollar failed again above 76 cents last night as the US dollar regained some footing after coming under heavy selling pressure. But a weaker US dollar is clearly favoured by president Trump and his team.
That puts upward pressure on the Aussie and other currencies against the US. And that means the Australian dollar is coiled for a break higher.
What You Need To Know
I've written often this past week that the Aussie dollar's outlook is not its own. That the AUD/USD is largely being driven and buffeted by moves in, and sentiment toward, the US dollar.
That's something that is in evidence with even just a casual observance between the hourly directional moves of the AUD/USD and the US Dollar Index.
Naturally it's not JUST the US dollar driving the Aussie's moves. Things like the strength shown in the NAB business survey yesterday or the continued growth in investment borrowing for housing are also important - because taken together they reduce the risk of another RBA cut.
But markets since the US presidential election have been all about Trumponomics, reflation, the US dollar and the Fed.
Which is why the overall hourly, and daily, directional correlation, between the AUD/USD and the DXY - or euro - have been so strong.
So it's worth discussing the outlook for the US dollar after it finished the month of January right at the bottom of the 99.50/100.00 support zone I've been highlighting. Should the DXY finish here or lower this week will mark the sixth week in a row the US dollar has weakened by this measure.
This level, and the associated 1.0850/70 region for the euro, 112 in USD/JPY and 0.7610/20 region in AUD/USD are at risk of being broken for two reasons.
First, markets are rethinking Donald Trump, his presidency, his policies, his execution, and also the potential efficacy of his presidency. In doing so they are reducing - or at least rethinking and not adding to - positions in stocks and the US dollar.
The second, more forex specific, is that it is clear the president and his administration hate the strong US dollar and want to use it as a trade tool.
Last night Trump’s trade negotiator kicked off by calling Germany a currency manipulator as he did in an FT article overnight. The FT reported that Peter Navarro, the head president Trump’s new National Trade Council, told the paper that Germany is using a “grossly undervalued” euro to “exploit” the US and its EU partners.
Trump himself, when talking to pharma bosses, then accused China - again - and Japan of also using currencies to their advantage.
Now I'm not going to be so silly as to deny that Trump, or Navarro, are entirely wrong. They aren't in the case of the benefit Germany gets by having its currency attached to Spain, Italy and Greece. Not am I going to ignore the benefit Japan, China, Australia, or any other country gets from the shock absorbing ability of currencies which fall, or rise, to smooth out economic activity.
Look at the UK and the pound after Brexit. Look at the Australian dollar over 30 years of floating and its importance to Australia's near world record run without a recession.
So yes, trump would love a weaker US dollar. Throw in increased uncertainty and we have the US dollar, and the crosses it's paired against ready to break.
But in pure price, chart, or technical terms these levels have to break.
For the Aussie specifically, it's 0.7610/20 that's important. But I'm inclined to use the euro or yen, and whether they can break the levels discussed above, as the key to whether this is just a short term move or something bigger.
For the moment a break of 0.7610/20 opens the way to 0.7650/6- and then 0.7720/40. On teh downside there is plenty of support in front of 75 cents. I'm not bullish unless or until topside resistance breaks.
Have a great day's trading.