Man The Pumps, The Australian Dollar Is Sinking
Axi | Apr 27, 2017 11:12
Originally published by AxiTrader
The Australian dollar traded down to a low of 0.7455 against the US dollar overnight. That's the lowest level in 3 months as the Aussie continues to struggle under the weight of expectations the RBA may be the only major central bank to retain an easing bias and as the commodity bloc suffers under changed sentiment flowing from the administration's nascent trade war.
This latter theme is of particular import for the Aussie it seems.
While theCanadian dollar and Mexican peso are the most directly affected by the application of Tariffs on Canadian Lumber and the administration's mooted plan to withdraw the United States from NAFTA, it seems that the Aussie and kiwi are being caught in the backwash because of what it potentially means for global trade.
Indeed the kiwi, in particular, is likely suffering from President Trump's focus on dairy.
Sure it might be the Canadian dairy farmers who have raised his ire. But based on the price action of the kiwi, and AUDUSD, there appears to be a sense by forex traders that this focus on trade could ratchet up and take in other nations as well.
Which is why the usually positive backdrop of increased risk appetite hasn't helped the Aussie and kiwi in the way that it usually would.
Equally though in the Aussie dollar specific sense the inflation data yesterday was a sign that the RBA could be the only major central bank which retains an easing bias this year.
As I wrote earlier, inflation wasn't really poor enough yesterday in a headline sense to knock the Aussie off its perch the way it has. But if you break down the data line by line, item by item you get a sense that aggregate demand in the domestic economy is not that strong. I’m a strong believer that inflation comes from pricing power and pricing power comes from either monopolistic style power or solid underlying demand.
To that end the data showed that there were solid increases in Q1 for education (+3.1%), health (+2.0%), and transport (+1.5) with the latter driven by a 5.7% increase in fuel costs. But these moves were offset by falls in discretionary items such as clothing and footwear (-1.4%), furnishings, household equipment and services (-1.0), and recreation and culture (-0.7%). This combination suggests the domestic economy faces some challenges at a consumer level. So the RBA is not completely off the table even though at 2.1% for headline inflation is back in the 2-3% range.
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So the RBA is not completely off the table even though at 2.1% for headline inflation is back in the 2-3% range. My sense is that is weighing on sentiment.
So to the charts.
I said on my usual 7am SkyBusiness cross this morning that my sense is the Aussie is headed back toward 72 cents against the US dollar. That's based on the failed rally to 0.7610 recently, the new low for this run overnight at 0.7455 and the weekly trend that is still pointing lower.
But to get there we have to go through some other levels first and for the moment the 138.2% extension of the selloff and then aborted recovery is coming into the frame now. It's at 0.7374 which is my target level now.
One thing worth noting for the RBA and the economy. The Australian dollar weakness is perfect. That's because it can add stimulus to the economy in a way that doesn't goose housing prices or borrowing the way rate cuts might right now.
So don't expect the RBA to fight this. Indeed they may even encourage the weakness if they get the opportunity.
Have a great day's trading.
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