QUICK RECAP
Just as the speculative community has rebuild its Australian dollar long position to levels not seen since April the Fed has delivered a shot in the arm to the US dollar putting the Aussie dollar under pressure and these new longs at risk of liquidation.
That's regardless of the many positives supporting the Aussie. At the end of the day it really is the Fed and US dollar that matter more than anything at the margin in forex traders minds right now.
WHAT YOU NEED TO KNOW
As highlighted recently in my note the Australian dollar is under pressure as the US dollar finds support every time the AUD/USD rallied above 77 cents recently the sellers were lined up to knock it back.
That in itself creates a vulnerability in the eyes of traders with even the most cursory look at a chart of the daily price action offering an obvious point of resistance the Aussie dollar has hitherto been able to best in recent trade.
That, together with noises we were already hearing on a consistent basis from a wide arc of Fed speakers lead me to suggest that "I'm looking for a test toward 0.7550 and then 0.7500 over the course of this week".
So as we open the week at 0.7549 the big question after Jackson Hole is whether the Aussie will find support here and down to 0.7500 or are we at the start of a deeper retacement?
Looking at the fundamental outlook a lot depends on how aggressively the market wants to read the messages emanating from the Fed after Jackson Hole and as we head to the next meeting in September.
As highlighted in today's markets morning Fed chair Janet Yellen said that the case to raise rates had strengthened “in light of the continued solid performance of the labour market and our outlook for economic activity and inflation”.
That's not too aggressive but when vice-chair Stanley Fischer told CNBC, in response to a question about a September hike and maybe two by year's end that "I think what the Chair said today was consistent with answering yes to both of your questions" we had a the hammer to Janet Yellen's nail,
Naturally Fischer, like most of his colleagues, stressed the data is what's important in the lead up.
That's what seems to have given many traders an out. They look at the 1.1% Q2 GDP update that was released Friday night, they wonder how long the US employment market can continue to remain strong, and they bet that the Fed will again find an excuse not to hike rates.
JUDGING THE FED ON ITS OWN WORDS
What is important here in my view is that we must judge the Fed by its own words, calibrated against why they haven't acted again in 2016 after the December 2015 rate hike and then evaluate the situation now.
To that end the risks the Fed identified in holding fire this year, "conditions abroad", Brexit, China, and market turmoil have all abated.
At the same time stocks at sitting near all-time highs, the US consumer is doing well as the upgraded 4.4% growth rate in the GDP data for consumption showed. Wages are also rising, employment remains strong and the Atlanta Fed’s GDP nowcast for the second quarter is currently 3.4% as at August 25.
When I tie it all back together I can't help but think the Fed is going to move once, and maybe twice this year.
Indeed that's the case made by Cleveland Fed president Loretta Mester in an interview with the FT published this morning.
Mester said the case for an increase in US short-term rates was "compelling" and that the US economy had "proven itself to be resilient through a number of shocks" which supported the case for higher rates.
But they can wait I hear a 1000 voices cry.
Not so says Mester who told the FT "If you inappropriately keep interest rates too low for too long then you put yourself in a position of perhaps having to raise interest rates more strongly in the future...Those are the kind of risks we have to weigh … We have to be very deft about it.”
Indeed they do. A gradual approach now instead of a sledgehammer later.
So the fed is sending a clear signal, one which forex and bond traders have received even if stocks want to ignore the message - for now.
That means the US dollar has regained its poise and pushed nicely off the trendline support we highlighted back on August 19. Here's the latest DXY chart from my Reuters Eikon terminal.
SO WHAT'S IT ALL MEAN FOR THE AUDUSD
It seems that even as the Fed was signaling a renewed focus on higher rates, and the AUDUSD was struggling to hold above 77 cents traders were still looking to buy the Aussie. Data over the weekend showed longs are back near April levels for the speculative community based on IMM data. Here’s a chart from HSBC.
Speculative traders are now back where they were in April and that level of longs suggests two things.
A lot of demand has been sated. And, if the Aussie dips through 75 cents these fresh longs could soon be liquidated.
To the charts.
Looking at the daily chart the down pulse over the past two days is clear. What you can't see, because it would make the chart too messy, is that the fall has now pushed down through the 50% and 61.8% retracement of the move from the long legged doji, and false break out, back ion July 27. That fall saw prices dip to 0.7418/20 which is my target for the Aussie on a weekly time frame.
Below that support comes in at the 200 day moving average and bottom of the wedge around 0.7360/70.
The 4 hour charts are a little overdone so perhaps this early Asian selling will abate for a while. But just as last week's 4 hour suggested a pause before the fall it is a similar outlook today.
Have a great day's trading
Greg McKenna
Chief Market Strategist AxiTrader
axitrader.com.au
www.gregmckenna.com.au
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