Australian Dollar Pushed Back Toward 77 Cents

Originally published by AxiTrader h2 Key Takeaway/h2

The Australian dollar defied the US dollar's strength on Friday night, and again this morning, to push back toward the 77 cent level.

At 0.7674 it's just a little more than 20 points from the highs of the past few weeks as the combination of better risk appetite across markets, solid Chinese trade data, and a continued rally in Australia's commodity basket combined to see it outperform.

That suggests that the preconditions for a test, and probably breach, of upside resistance could happen this week.

It's a big week for Australian markets, and the AUDUSD. We see the release of two consumer sentiment surveys, the all important - to me at least - NAB business survey, and of course January's jobs data.

While employment on Thursday is the most important monthly data point for traders the release tomorrow of the National Australia Bank Ltd's (AX:NAB) monthly business survey is the key for me. That's because it gives us not only a window into business confidence across the nation but also into the actual "conditions" business is reporting.

That's important because in getting a read of how business is trading, how profitability looks, and how new orders and employment intentions are, we can get a gauge on how the economy is tracking. I also see this survey as particularly important because how the managers in these businesses report will be the experience their workers live. So there is a feedback loop - sometimes negative but recently positive

So even though markets don't usually react aggressively to this data point there is a feedback loop - sometimes negative but recently positive - into consumption in the economy which taken with the business survey itself informs my thinking on the outlook for the economy.

We'll know tomorrow at 10.30am.

In the mean time it's worth discussing the AUD/USD where it is here and now.

Last week RBA governor Lowe set himself apart from his RBNZ counterpart by implicitly saying neither he, nor the RBA, is worried about where the Aussie is right now.

Indeed in his speech last Thursday Lowe explicitly highlighted the recovery in commodity prices, the terms of trade, and global growth as reasons to be optimistic about Australian growth. These are also supports for the Australian dollar against the US and on the crosses.

So it's worth looking at the relationship between the AUD/USD and the price of iron ore (and oil as an energy/coal proxy). What's clear is that if the Aussie was a function of just the iron ore price (green line) it would be up and through 77 cents and challenging 80 cents, perhaps 82.

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Now of course neither the Aussie dollar, nor any other currency, is a function of just one driver. But in the context of the economic impact of the recovery of commodities on jobs, wages, and Australia's economic growth the price is important. Throw in the fact that the RBA believes this story - that growth will return to the pink of health so won't cut rates - and you suddenly have a multifactor model that just might help explain moves in the AUD/USD.

That suggests a higher Aussie awaits.

But technically 0.7700/20 still looms large on the horizon. And then above there is resistance again at 0.7740, then 0.7770/80. And of course last year's high around 0.7840.

The dailies look a little overcooked so unless or until the 0.7700/40 region is bested traders are likely to remain wary.

Indeed, while the longer term outlook for the Aussie is brightening my technical system is short with a stop above 0.7720. But that might all change this week. Time will tell.

Have a great day's trading.

Written By: Axi