Australian Dollar Weekly Wrap

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The Aussie and the markets performance this week has actually been very constructive for a move higher if Greece ever gets sorted. There is enough pressure on politicians to get their act together and we had German Chancellor merkel backing away from a bail in of investors overnight which gave some hope that a rabbit will be pulled from the hat.

Equally however Greece remains a risk, as does Ireland and now Italy is on negative watch for downgrade by Moodys. But to my mind at least the biggest risk is the weakening economic outlook in the US and elsewhere. For the Aussie, if growth does weaken and the USD stays stable (I’m assuming that it won’t break its lows because the globe cant afford a wholesale USD rout) then weaker global growth kicks the legs out from under one of our key 5 drivers.

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The chart above is the ECRI weekly leading index that I watch and some readers have been commenting on over the past few weeks (its from Doug Short at dshort.com). It’s a long chart but this week the Weekly LI fell to 3.7 from 4.1 which is the 8th month week in a row that it has fallen since the recent high in April.

So a slowing US economy if Europe gets sorted will hurt the USD but also hurt the Aussie but we’ll see it against the crosses like EUR/AUD, AUD/GBP, AUD/KRW, AUD/HKD (I still owe a piece on this one – sorry) and so on.

But let’s look at the price action in the Aussie outright and see how it looks. Charts from my Bloomberg Terminal.

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Here we see a rangebound market. Traders either love or hate these. Personally, I love them becuase you know where the levels are and you can have a go at trading the break when it comes. The turtles will be very excited when this range ultimately breaks but for now we see sellers in the high 1.07’s and buyers in the mid to high 1.04’s.

On the dailies it looks like all the positives that have accrued to Aussie in fundamental terms are what is giving it the support, and equally, as I wrote yesterday, this isn’t a “real” risk off event yet. On the technicals we can see the Aussie may actually be setting itself up for a break higher in the next week or two.

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Some may question my use of the old trendline as support for the Aussie but in my experience I like to leave as many old trend lines in place as possible. It is uncanny how often they end up still working. Who know’s whether technicals work for their mystical qualilties or just because everyone looks at them? Doesn’t matter, they work and should be part of the tool kit.

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Which brings me to the USD index. Clearly this is heavily weighted against Europe but as the chart above shows this week it retested the downtrend line and rejected it out of hand. Two things are evident for the USD at present.

  1. It can’t rally under its own steam and needs bad news elsewhere to make it stronger
  2. The US based data is on balance weak so this will remain the case for a while yet

So unless we get a full blown European catastophe which sees the USD strengthen it may just bump along the bottom for a while. If we see EUR below 1.3950 we’ll know the USD is going higher, substantially so and then that the Aussie will come under some pressure outright against the USD but probably do ok on the crosses except the AUD/CHF.

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So all in all a much more eventful week for markets than the Aussie.