Originally published by AxiTrader
The Australian dollar is opening the week on the back foot today after a combination of RBA rhetoric and a US labour market strength induced recovery in the US dollar saw the AUD/USD fall from a high of 0.7980 Friday to a low after the jobs report around 0.7890.
At 0.7916 the Aussie is off that Friday low but with CFTC data - released Friday night - showing that big speculative accounts were at their most bullish in 4 years as at last Tuesday the inherent vulnerability of the Aussie to further weakness is writ large.
With a net long of 60,713 positions the accounts the CFTC calls "non-commercial", and we can call speculators, is at the highest level of longs since April 2013 when the Aussie was trading above parity against the US dollar.
That CFTC showing more than 60,000 net long positions was as at the CoB in US trade last Tuesday when the AUD/USD traded up to a high around 0.8040. That's very long historically as the chart shows.
So when you throw in the AUD/USD's extension beyond most models of fair value, throw in the technical outlook, a nascent turn in the US dollar, and an RBA that felt the need to both downgrade growth with the Aussie up near 80 cents warn of further headwinds should it continue to appreciate, and - big breathe - it's not hard to see why the Aussie is lower.
But before I get to the price action let me quickly recap what the RBA said and did in Friday's quarterly Statement on Monetary Policy (SoMP).
The RBA was unequivocally upbeat on the outlook for the economy. But it did downgrade it's growth outlook a little over the course of this financial year. That saw the forecast dip to a 2.5%-3.5% range from a 2.75%-3.75% range.
And the bank is worried about the implications for growth and inflation from the rise in the Aussie dollar noting that "Further exchange rate appreciation would tend to generate a slower pick-up in economic activity and inflation than currently forecast".
Together it's a message to traders and investors saying the Australian economy is doing well, will grow near potential, but won't be heating up fast enough any time soon to warrant rate rises. Especially if the Aussie dollar starts appreciating again.
The key here though is the US dollar because all the things that the RBA sights as positive for the Australian economy - domestic, trading partner, and global growth for example - are also normally associated with a strong Aussie dollar.
So yes the RBA wants a lower Aussie - but if the worm hadn't turned for the US dollar with a solid non-farms Friday we might be having a very different conversation about the Aussie dollar's outlook this morning.
We still might, depending on what happens with US data flow.
Moving to price action though and the setup and trade my system instituted last week worked out pretty well - for the Aussie and a host of other pairs.
Clearly, the key level to watch is both Friday night's low around 0.7890 and then the 38.2% retracement - and recent lows - of the move from 0.7570 which comes in at 0.7876.
More broadly - and taking into account the rally from 0.7370 - the target, the 38.2% retracement, is at 0.7800. Topside resistance is at 0.7975/80 today.
Have a great day's trading.