Originally published by AxiTrader
The Australian dollar has had an interesting 48 hours with the rally and sell off in Shanghai metals driving a surge and then pullback in the AUD/USD. That pullback was then exacerbated by the risk off tone in stock markets overnight - and break of important support in the S&P 500. And it's all combined to knock the AUD/USD 80 points or so below yesterday's high around 0.7962.
Before talking about the outlook for the Aussie it's worth recapping the impact this wild surge in Shanghai metals has had on the AUD/USD over the past couple of days.
The Aussie is not a single factor currency. But sometimes single factors - which are important to traders and investors views of the Aussie dollar's value - can dominate all other factors. So as I highlighted in yesterday's note the Aussies rally is very much about copper - and the surge in Shanghai metals more broadly.
Here’s the 5 minute chart of the price action between it and the 3rd contract on the Shanghai metals exchange up until about 6am this morning.
It has been a wild ride. A break down in sentiment toward stocks, a surge in volatility, and a material deterioration in risk appetite are never good for the Australian dollar
So when you throw in a break down in sentiment toward stocks, a surge in volatility as the CBOE Volatility Index rises back to 15.5, and a material deterioration in risk appetite of investors now focussed on the dysfunction of the White House and the materially reduced chances of Trumponomics ever being enacted then we have a set of preconditions that would not normally be good for the Australian dollar.
There are two - very strong - mitigating factors however.
The first is the strength of the Australian economy.
Yesterday’s employment number in Australia was another solid report. The rise of 27,900 jobs in July and unemployment rate of 5.6% reflect a jobs market that is both strong but still experiencing some slack. I’m not overly worried by the full-time/part-time split because the ABS uses a 35 hour delineation between the two categories. That’s way too high to really convey the true picture.
Key for me – and regular readers won’t be surprised by this - is that the data also showed that the total number of Australians employed hit a new record of 12,201,400 in July. That’s more Australians earning, more Australians spending, more money circulating through the economy.
The economy is in good shape.
The second mitigating factor for the AUD/USD right now is the US dollar side of the cross. I say that because even though I have been the cheerleader of the crowd saying US data is improving and will continue to improve - at least in Citibank Eco Surprise Index terms - I also recognise that if questions really get raised about the Administration, its stability as/if Cabinet members leave, and the impact that will have on growth - and the Fed - then the US dollar may suffer.
I'm fairly sure what I'm wondering about on this front right now is also occupying the minds of many fundamentally based investors.
So for the moment the uncertainty around the US dollar - are we at the start of a new surge for it or just in a hiatus before it falls again - is supporting the Aussie dollar above 78 cents.
Which brings me to the technicals.
It was an ugly reversal candle on the dailies yesterday. But it pushed up and through the 61.8% retracement of the fall from 0.8040ish back in early August. So it would have cleaned a lot of shorts out.
As I noted yesterday my remaining 25% of my position was taken out Wednesday night as the AUD/USD surged up through the downtrend at 0.7880.
So what next?
78 cents is still a key level for me. It's the 38.2% retracement of the rally from below 74 cents to around 0.8060. It's also where we bounced from the other day. Equally the similarly important level of 1.1680 in the Euro is worth watching as an indicator of US dollar strength - or not as may be the case.
If the Aussie breaks 78 cents we could a big move lower.
Closer to hand though, the 1 and 4-hour charts suggest that 0.7865/70 region is the key on the day. It's both the 61.8% retracement of the surge to yesterday's peak and the old trend top the AUD/USD broke out of.
Top side 0.7915 looks important.
Here's the 4-hour chart.
Have a great day's trading.