It's been a wild month for the Australian dollar

The Aussie dollar has had a wild ride the past month, falling from a high of 0.7850 to a low of 0.7570.

That’s only a three cent range for the month. But, as the up and down nature of the 30 minute chart shows there has been quite a bit of two-way volatility in the Aussie.

The primary reason is that there are a number of competing forces in forex markets broadly and the Aussie dollar specifically at the moment.

Here are the main ones.

US dollar: It’s always about the US dollar. That may seem strange to those who don’t trade currencies for a living. But the other side of the AUDUSD exchange rate — the US dollar — is as vital as any input in determining the direction of the Aussie. In most cases its the dominant driver.

The US dollar surge to 100 in US dollar index terms, which drove the Euro to 1.0450 and had forecasters predicting a run to parity, knocked the Aussie dollar to a new six year low.

Likewise, the US dollar sell-off in the wake of the FOMC’s more dovish tone drove the Aussie higher.

The RBA and interest rates: Interest rate differentials are an important driver of currencies, especially in an environment of zero interest rates. On Friday Westpac put out a report which said that because of ECB and BoJ QE and the lack of available risk-free assets in global bond markets, the Aussie dollar will defy the doomsayers and hold up better than many expect.

In the research Rob Rennie, Westpac’s Chief Currency Strategist, said:

61% of Eurozone debt with maturity of 5 years or less currently trades at or below zero yield. 40% of Eurozone debt of all maturity trades at or below zero yield. 6 months ago that was 17% of total Eurozone.

In a world where so much of the globe is at or below zero interest rates the Aussie and its AAA rating stand out. That’s regardless of the fact that local interest rates on cash and bonds are at modern-day lows.

The other important point in explaining the Aussie’s two-way flow is that there is a real chance we might have seen the high in the US dollar for this run.

While some research houses were downgrading their forecasts to an EURUSD rate of 85 and 90 cents, last Friday HSBC upgraded their forecast to 1.10. In doing so they became the first bank to change their view to positive on the Euro.

But the market is far from impressed with the Euro or its prospects for a rally.

So at best this could just be a pause before the dollar strengthens again or perhaps an inflection point and an end to the US dollar rally.

Either way the price action in the Euro, and for the Aussie, is the same.

Volatility begets volatility: Traders become a bit tentative and trade smaller positions with less conviction. As a result of this the average daily range on the Aussie and Euro have been at their highest in more than two years. Equally if it’s an inflection point the battle between the bulls and the bears is undertaken in earnest. At inflection points the price action for assets is always volatile. That’s because when a trend reverses neither the old bears or the new bulls are convinced the move is sustainable.

These factors lead to an uptick in volatility which feeds on itself until it burns out once the trend is either reversed or re-established.

It’s been a wild ride for the Aussie and the signs are there that it may continue.

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