The Australian Dollar Has Finally Caught A Bid - Here's How
Axi | Jun 29, 2017 12:44
Originally published by AxiTrader
Wack of his head and put on a pumpkin.
That's the sentiment regular readers might feel today with theAUD/USD up at 0.7636 and on the cusp of a big break higher.
The rally started yesterday when a piece by former RBA board member and ex-HSBC Australia chief economist John Edwards' piece written for the Lowy Institute earlier this week gained traction among traders.
In his column, Edwards suggested that like their central banking counterparts around the globe the RBA "is already thinking about a program of rate increases that will continue for several years".
Edwards looked at the RBA's forecasts for the economy and said that if the RBA is right then rates in Australia are too low with a cash rate of 1.5%. As a result, he says the RBA may need to make 8 rate hikes of 0.25% over the course of the next two years to get the cash rate back to a more "normal" 3.5%.
Many have argued Edwards has over cooked things a little. But what's important is that his comments, his path for interest rate he says is based on an expectation that "within three years Australia’s economic world has returned to more-or-less normal, with wages growth of 3.5%, inflation of 2.5%, and output growth of 3%".
Ludicrous, many have said.
But what's important about Edwards contribution is that such a Panglossian forecast "is, after all, exactly the forecast that both the Bank and the Australian Treasury publicly offer," he said.
Correct.
So we can't dismiss Edwards comments out of hand.
Indeed the price action in AUD/USD suggests forex traders have embraced them. And, as I tweeted this morning when you throw in the rally in commodities, the rise in risk appetite as US stocks go bid again, the technical outlook, and a weak US dollar, you can see why the Aussie is sitting where it is this morning.
The big question is whether we are going to see a big break higher.
I'll get to that in a minute. But first I want to address the questions of relevance of the Aussie dollar and Australian assets in global investors portfolios and the impact that has on the Aussie dollar.
I've been asked by a few readers if that hypothesis I've been discussing means the Aussie can't rise. The answer is no. And that's something I haven't been clear on.
What the repointing of focus from investors means is that the Aussie dollar can lag the rally of other currencies through time against the US dollar. It also means if the Australian economy hits a speed bump any selling of the Aussie dollar, or Australian assets would be outsized relative to the actual news item.
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In the mean time AUD/USD is on the cusp of a breakout now that 0.7640 is being attacked. I'm not much of an Elliott Wavician. But I do use Fibonacci levels as projections for moves. And on that front if the Aussie can take out last night's high at 0.7644 then we might be in for a run toward 0.7735/40 as 5th wave.
Before the US dollar recovers perhaps.
Here's the daily chart:
Have a great day's trading.
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