The US dollar's weakness saved the Aussie from retesting its lows

Market Analysis /
Greg McKenna / 26 Jun 2018

The Bloomberg email says "brace for more trade turbulence". 

That sentiment neatly sums up what ailed markets overnight, why stocks fell out of bed, why they reversed a little when trade representative Peter Navarro tried to calm fears, and why the Aussie dollar fell 0.4% to be the worst performing major currency against the US dollar. 

But I'd say the Aussie dollar actually did pretty well last night all things considered. 

We had a risk off mood in Asia, Europe, and then the US. We had copper fall completely out of bed and head under $3 a pound when it was knocking on the door of $3.30 just a couple of week's back, he have growing worries the trade war will adversely and materially impact global growth, we have Australia economic outlook already at risk from consumer retrenchment before this, and we have a clear downtrend in the AUDUSD. 

So the fact the Aussie didn't utterly capitulate is probably down to two things - the USD weakened and the market is already net short AUD in a size not seen since the Aussie was trading below 70 cents in late 2015 early 2016. 

I already shared this chart of the AUDUSD versus the short term US High Grade Copper future (HGc1) on a 10 minute basis both yesterday in this note and then again today in Markets Morning. It suggests for the second day in a row that copper needs to bounce or the Aussie might struggle. 

Click on me, I'll expand
Click on me, I'll expand

More fundamentally though there is a suggestion that the weakness in emerging markets currencies has a correlation with future weakness in commodity prices which may, in turn, hurt the Aussie. 


Source: WSJ Daily Shot
Source: WSJ Daily Shot

I can clearly see the correlation. But the causality needs to be questioned, at least by the degree of move size, in this instance. I say that because this selloff in EM is not just about global growth - which is the implied correlation - but about the Fed rate hikes, balance sheet tightening, and opportunities in other markets. 

But narratives matter and the fact folks are talking about this and the reality that these commodities have a strong linkage to the AUDUSD and expectations about the outlook for Australian growth and the terms of trade mean I have to take it into account the chance that the EM crisis rolls into selling of commodities and metals and mining shares. 

It hasn't really happened yet - copper is just back we=here it was before the unexpected, Escondida induced, run higher - and metals and mining shares are still holding up. 

But if it does, given all the other negatives afflicting the Aussie the downside will beckon again. Unless, as I've written often, the USD falls out of bed. 

To the price action then and on the day I’m watching support at 0.7395, then 0.7373 and the low 0.7440 region. Topside it’s 0.7445/50 then 0.7472/77.

Click on me, I'll expand
Click on me, I'll expand

Have a great day's trading.

Greg McKenna

Chief Market Strategist

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