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What a recovery … but what now for the AUD?

Published January 7, 2019

by Nicholas Cork

by Nicholas Cork

The AUD has staged a very impressive recovery thus far from its 10 year low made on Thursday, and supporting factors have emerged to potentially give it more upside impetus this week. In 36 hours of trading it has risen approximately 4 cents to close near 0.7120 in New York, fueled by a strong DOW (+750 points) and scrambling short-term currency traders. AUD last fell below 70 cents 24 months ago and since then long-term traders and especially investors would have been placing stop-loss selling orders below 0.7000, hence the ‘clean-out’ of these orders would have been significant, combined with the AUDEUR and AUDJPY selling orders that were also triggered.

This now gives the AUDUSD a touch more psychological support in the near term as that threat of a large stop-loss triggered self-off has all but gone, and those sell orders possibly replaced with buy orders now as investments will have to be reweighted. Factor’s to lend fundamental support are,

1. if successful, the announced US-CHINA trade discussions today and tomorrow. China appears upbeat with the Commerce ministry saying the US delegation “will conduct proactive and constructive talks with the Chinese working group over how to implement important consensus reached by the two state leaders in Argentina.” And the US is also upbeat but conveyed Trump style, “I think we will make a deal with China, I really think they want to. I think they sort of have to. China’s not doing well now. And it puts us in a very strong position. We are doing very well.” …. Fingers crossed.  

2. The reducing advantage of US yield expectations over those of Australia, with its impact on the AUD for the past 12 months reflected in the chart below using the 2 year IR benchmark as an example. The recent change in view for AUD interest rates to a possible cut capped this correction last week.

Finally some technical support that is also reflected on the chart below is the rapid rejection of that 10 year low seen below 0.6750 and the dynamic recovery now occurring. This has seen the AUD healthily close above the previous 12 month resistance line after falling back below it and back into the old trend channel on Thursday. Further supporting chart-wise is the falling wedge pattern that had been forming for 2 months that now appears to have broken higher, thereby giving the AUD a positive technical signal to start the week.

As for the negatives – they still swirl around and just last week the dour global manufacturing outlook was all that mattered. However the irrational JPY and AUD movements just seen have more likely left the market short of AUD and long of YEN now, thus bear in mind the real issues may take a back seat at the moment as the market rebalances. Note the  Bank of Japan has voiced concern on the weekend over YEN movements so we may see Central Banks step in to the fx market if irrationality returns.

AUDUSD chart below (reuters)