Aussie Nears 2-Month Uptrend
Marc Chandler | Jul 20, 2016 09:18AM ET
The Australian dollar recorded a key downside reversal last Friday (July 15) and had seen follow-through selling this week. It is off 1.25% over the past three sessions, which makes it the worst-performing major currency behind the Japanese yen.
As this Great Graphic shows the recent losses that have pushed AUD close to the uptrend line drawn off the late May low near $0.7150 and the spike low from Brexit (~$0.7300). The trendline is found near $0.7450 today.
The $0.7470 area that the Aussie tested yesterday and today corresponds to a 38.2% retracement of that advance since late May. The 100-day moving average is near $0.7485. The 50% retracement is found a little ahead of $0.7410, and the 61.8% retracement is near $0.7350.
Short-term speculators may be caught leaning the wrong way. In the CME futures, speculators have increased their gross long Australian dollar futures position by 40% over the past two reporting weeks to almost 46k contracts -- the most in two months.
Two things are happening. First, the risk of a rate cut by the Reserve Bank of Australia for next month has increased. Soft data and the RBA's minutes have encouraged such speculation. The key may lie in next week's Q2 CPI report. Confirmation that price pressures are weak will fan expectations of a cut in August. In Q1, Australia's CPI fell 0.2% for a 1.3% year-over-year rate.
Second, the strength of US economic data and comments from some regional Fed Presidents has investors reassessing the likelihood of a rate hike later this year. Specifically, the Fed funds have been averaging around 40 bp in recent weeks, which is a bit firmer than through the first half. There are several reasons for the firmness of Fed funds that are technical in nature rather than as a result of policy, but some of the influences, like the changing of some money market funds, may persist. The Dec 16 Fed funds futures contract implies an average effective rate of 47.5 bp.
Given that the December FOMC meeting may be 'live', December fair value (average effective rate for the month) is about 52.5 bp. That means that the December contract is pricing in seven of the 12.5 bp (52.5 bp fair value on a 25 bp Fed hike and the 40 bp that Fed funds are currently averaging and the implied yield on the Dec contract 47.5 bp). That translates to the market discounting about a 56% chance of a hike at the last meeting of the year.
Get The News You Want
The likely divergence of monetary policy and the late market positioning leaves the Australian dollar vulnerable to a greater shake out. The pullback in gold and copper prices are additional weights on the Aussie. Technical factors also warn of the risk of further losses if the $0.7450 area yields.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.