Originally published by AxiTrader
78 cents.
That's roughly where the Australian dollar finds itself today after trading up to a high of 79 cents less than 24 hours ago. Indeed it traded back up to 0.7878 in the wake of the initial dovish read traders took of the FOMC minutes just a couple of hours ago - before traders recognised that the doves are the doves and the hawks are holding sway at the Fed this year.
So the Aussie is sitting at 0.7806 as I write and looking increasingly like it has 76 cents or there about written all over it.
I say that for two reasons.
The first is that the US dollar's recovery from last week's double bottom, close enough anyway - at 88.11 in US Dollar Index terms continues. It's back at 90.03 this morning. And while 91 is still the level I need to see broken technically for me to have more confidence a much sharper move is afoot the balance of probabilities now that EU data has weakened and US data remained strong, along with a Fed set to continue to raise rates means a test at least toward this resistance is important.
Indeed as I highlighted in my Markets Morning piece today we have seen an utter collapse of the Citibank economic surprise index for Europe recently.
From 42 at the beginning of the month the CESIEUR has collapsed over the course of the month and printed -0.02 overnight after the PMI’s for the region missed. At the same time the CESIUSD has remained above 50. In and of itself this is not the greatest indicator – either outright or as a spread – for the EURUSD rate. But it is indicative that even with markets thinking Weidmann will become ECB boss policy divergence will be significant between the Fed and ECB because their economies are in different places. For me that biases Euro lower here and now as traders start to think about that and factor it in.
That's important for the US dollar outlook and thus important to the Australian dollar.
The other reason I hold a jaundiced view of the Aussie right now is that price action on US stocks in the last couple of hours trade.
The Aussie never does well when there is a market funk as the fall to recent lows shows. Equally, it is fair to say that a positive backdrop in markets and for risk assets is usually also positive for sentiment toward the Aussie dollar.
Since December, the melt up and then meltdown in stocks has seen the Aussie dollar have a much stronger than normal price move - directional - correlation with the S&P 500 than is usually the case. So with the S&P 500 swinging from up 1% gain to a half a percent loss in the last 90 minutes of trade the chances of further falls and the tractor beam of same dragging the Aussie lower seem high.
And both those reasons are before we even contemplate how far negative the 2 and 10 year AUD:USD bond spreads go.
Looking at the charts now and the reversal in the AUD/USD off my fast moving average and the downtrend I drew in yesterday is important. Not to mention the ugliness of this candle and the roughly 1% loss on the day and even bigger reversal from the high.
My target is a retest of the recent low and then a Fibo extension to 0.7615.
Have a great day's trading.