Here's Why The Aussie Got Crushed Again Overnight - It's All About The US Dollar

The Aussie Was Sold Heavily In Europe Last Night (Getty/Mark Kolbe)

What a day for traders.

The better-than-expected Chinese preliminary manufacturing PMI lifted the Aussie back above 89 cents yesterday afternoon. The Aussie was trading around 0.8925 at 11pm AEST before weakness in US stocks and a surge in buying support for the US dollar dragged it lower to 0.8827. Then it recovered slightly to 0.8840, early Sydney time.

It’s the classic battle between the combination of forces which drive the Aussie at the moment.

What the price action of the past 24 hours suggests is a big psychological shift in traders’ mindsets, with no sustained follow-through from the Chinese positivity. Rather traders are focussed on what is a growing sense that Australian growth is slowing or – more importantly – that there is a change afoot in global markets, and the US dollar is in the ascendancy.

The strength of the US dollar is the under-appreciated driver of the Aussie, and global currency markets generally. For all the fair-value models, terms of trade and other analysis by market pundits, the backdrop of US dollar and its attendant stability is the key determinant of direction.

Last night’s sell-off in the Aussie happened at the same time that USD/JPY and the Euro also reversed their moves against the US dollar. The key data points – Richmond Fed index at 14 and the US Markit PMI at 57.9 – were both very strong, compared to European data. This again explains why the US dollar is gaining ground everywhere.

Glenn Stevens said the world would look very different when the Fed started to look at raising rates, and the Aussie should be lower as a result. It looks like he is once again going to be proved correct.

30 min AUDUSD Chart – VantageFX, MT4

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