Originally published by AxiTrader
The Aussie dollar is back above 80 cents this morning at 0.8008 after rising 0.6% from 7am yesterday. That's a solid performance given the big falls we saw in Chinese iron ore futures yesterday.
But while iron ore prices, metals, and commodities more broadly are important inputs into Aussie dollar moves and notions of valuation so too is the US dollar. As I often write it is the underappreciated other side of the AUD/USD cross.
And when you look at the direction move of the US Dollar Index (inverted in the chart below - the blue line) against the AUD/USD (green), Dalian iron ore futures (purple), and rebar futures (gold) it's clear that of the drivers of the Aussie dollar's strength this year that it is the US dollar's fall which has the major directional influence.
That's not to say other factors are not important. It's simply a recognition that like many other US dollar pairs across the globe - except maybe the euro and sterling (quite recently) - it's the move in the US dollar which has been the primary driver.
Indeed, in yesterday's minutes to this month's meeting, the RBA said "The appreciation of the Australian dollar over the course of 2017 had, in large part, reflected a broadly based depreciation of the US dollar".
But that fact is a complicating factor for the economic recoveries both here and across the globe as US dollar weakness makes other nations effectively less competitive vis a vis the United States. And that's why other central bankers are now starting to resist this US dollar weakness
That's why other central bankers are now starting to resist this US dollar weakness.
And it's why tonight announcement of the Fed's balance sheet taper plans, FOMC participant dot plot forecasts for interest rates, and Janet Yellen's press conference are so important for forex markets in general and the Aussie dollar in particular.
Should the outcome be as dovish as the last batch of Fed speakers we heard from before the pre-meeting blackout period then the US dollar could be crushed and the Aussie will be back near, perhaps above, 81 cents and its multi-year highs.
Now, for mine, I believe the Fed is continuing on a normalisation path. And while I see the taper as having equivalence to a tightening in rates due to its eventual impact on bond rates, I still believe the US economy justifies higher rates this December and again in 2018.
Whether or not the fed communicates that tonight, whether the market reads it that way, or whether traders grapple for the dovish message will be instructive to whether or not the next leg of US dollar weakness is about to begin. Conversely we could see a signal that this truly is a bottoming in the dollar.
4 am AEST tomorrow folks. Then we'll have some idea.
Of course we also have a speech from Luci Ellis, the RBA's assistant governor for economics at lunchtime today. She won't want it to be, but it could be a market mover.
Looking at the charts now and the Aussie found support at my slow moving average and rallied to a high of 0.8019 overnight. That's short-term resistance and then the 0.8035 region which was the high on the previous two days before yesterday is the level to watch. A break could get things interesting. Realistically though only a move above 0.8060 opens up a run to the high at 0.8124/5. Support is 0.7975, then 0.7940/45.
Looking at the 4-hour charts and you can see I've drawn in a couple of little trendlines. The top lone comes in at 0.8027 as resistance while the steepness of the recovery from yesterday's lows suggests some short-term vulnerability. But only if the low of to bars back - 0.7990 - gives way.
Overall on the shorter time frame the broad uptrend is still intact unless yesterday's low gives way.
I'm still expecting a run toward 0.7850 support at some point.
Have a great day's trading.