Originally published by AxiTrader
The Australian dollar rallied to a high around 0.8038 on Friday as the US dollar came under a little pressure and as a combination of factors continued to support the bull case in the Aussie.
Of course, the reality is that for all the other factors like commodity prices, excitement about global growth, and risk appetite in markets, the reality is that it's the US dollar which is the biggest factor in the most recent leg of the Aussie dollar's surge.
Indeed the Australian dollar's price correlation with the euro over the past 35 trading days has been a very significant 0.94. So we can say with some authority that this is very much a US dollar move.
That means that AUD/USD traders will need to take heed of the direction from and impact of both the Bank of Japan AUD:JPY correlation -0.75 over 35 days) and ECB meetings this week. So on that front it is worth reiterating my view on these meetings as articulated in my Market's Morning piece earlier.
Both banks will be sensitive to the recent moves in their currencies and the chance that any signal of changed policy may accelerate the “momentum” plays in forex markets and particularly the continued collapse in the US dollar which not only undermines the inflation goals of these two central banks but gives the US and its companies a comparative advantage in global trade for goods and services. So I’m expecting some pushback from governor Kuroda and president Draghi. That’s particularly because there is a lot of “momentum” in the recent moves which central bankers may feel doesn’t reflect fundamentals.
Which means the AUD/USD could be nearing, or have in place a top for this run in what remains an overall strong uptrend.
That's especially the case because there is nothing material on the data front here in Australia this week to give further strength to the Aussie dollar rally. I say that because the surge in the Citibank Economic surprise index from -47 to +44 over the past month (and the closing of the relative gap between the US and Australian CESIs) has been a big part of giving the bulls confirmation that it's reasonable for the Aussie dollar to follow the euro so closely.
That leaves iron ore, which is up again but close to the long-term downtrend, copper, which is still sliding, and commodities more broadly as important influences in this holiday shortened week of trade in Australia.
Looking at the charts then the Aussie has completed six weeks of rallies with the close Friday. That's unprecedented in this bull channel it has been trading in since the low of January 2016.
That of itself isn't a reason for the rally to stop. Indeed it reinforces the fact of this weekly bull channel.
Looking at the daily charts though there is some suggestion of a topping pattern or a top, may be occurring.
On the one and four hour time frames the Aussie has broken down through the most recent uptrend line - even though it doesn't really look like it on the daily chart. I haven't got a sell signal yet - but it is a decent setup for one.
On the day a break of 0.7980 would open the way back to 0.7935 which is the level I'm watching closely this week for a sign the top is in. If it breaks a move lower of a further 100 points would be on the cards.
Topside the AUD/USD needs to drive through 0.8040 to kick higher.Have a great day's trading.