The recent AUDUSD rally was of sufficient magnitude to throw the bears off course for a while. But the action late last week puts the short term bullish case in doubt as this looks like a pivotal week.
I’ve noted a number of Aussie-negative factors of late, like the shrinking carry advantage of owning Aussie versus other currencies, a concern for the outlook in China, wobbly commodity prices, weak Australian mining company share prices, and a post-housing bubble environment in Australia.
But the Aussie has rallied very sharply against the USD in particularly since early June because of at least one overshadowing factor in the Aussie’s favour: namely, the investment world has strongly been anticipating a new global round of quantitative easing, which tends to favour the higher yielding Aussie the most and punish the most liquid, and most “money-printing” majors the most. Last week saw the Bank of England moving to ease once again and the ECB cutting rates, even if the latter was unable to shore up confidence in the Euro. The US data was also poor, though perhaps not poor enough to signal imminent Fed action.
But as anticipation of easing largely became fact late last week, the Aussie rally has faded a bit on profit taking and as the market wonders if it has been too aggressive in pricing in the arrival of yet another central bank liquidity gravy train. A possible dark horse support of the Aussie may be wealthy Chinese that are looking to secure some of their wealth beyond the Chinese borders in a suddenly post-bubble era and as the political environment becomes more charged.
Regardless, AUDUSD has fallen back into a short term limbo by falling back below 1.0225 area and this week may serve as a pivot week for the next several weeks, deciding whether we crumble back into a bear market (still the eventual preferred scenario in my book) or are simply maintaining a new higher range in preparation for an assault on those 1.0800 area (still looks very far away.)
Chart: AUDUSD
The move back below the 1.0225 support area throws the upside move in doubt in the near term. The real battleground looks like parity, which is where the 200-day moving average is also headed. The key Australian economic data point this week is Thursday’s employment report.
John J Hardy,
SAXO BANK