The US dollar was stronger again overnight as a combination of surging bond rates and solid retail sales reiterated to traders and investors across the globe that the US really is on a different path to so many other economies and economic regions at the moment.
That, as I have been writing for months now, means that policy divergence is a thing again.
More particularly though as I wrote in Markets Morning earlier, if you cut through everything myself and others have written over the past 6-12 months one key narrative emerges for foreign exchange markets.
That is, when global growth in synchronised the USD suffers as focus turns to the other side of any USD pairs. But, as we might be seeing now, when the USA is the bastion on economic strength, when the rest of the world is struggling once more, and when global growth isn’t synchronised in the manner that many thought, the focus turns back to the USD.
So the USD is rising as a result and the Aussie dollar is once again under pressure.
At 0.7467 the Aussie is around a cent below the double top high of Friday and Monday. It’s at risk of breaking down if this USD run combines with a more jaundiced view of the domestic outlook – as it might. That's particularly the case now the RBA seems to be deploying hope as an economic strategy (please see the Australia section in Markets Morning today)
And of course, today’s wage price index is going to be a big event for Aussie dollar traders against this backdrop and given the emphasis that the RBA has put on wages growth as a precondition for household and consumer recovery. Equally the fact the Federal Budget looks for a reacceleration in wages growth puts further pressure on this number as a key determinant of both the economic and fiscal outlook. For a great primer on the WPI today you should read Scutty’s piece over at Business Insider.
Which brings me to the price action.
The double top at 0.7566 was a test and failure of the 38.2% retracement of the fall from just above 78 cents to the recent lows around 0.7411. That's an ominous sign and the set up for a big move lower should the recent low give way.
While that holds this is just a retest of support. If it breaks the next target is 0.7330 and then the actual target of 0.7135 which is the 138.2% extension of the 78-74 move.
Resistance is 0.7490, 0.7505/10 and 0.7535.
Have a great day's trading.
Chief Market Strategist
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Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies