The Aussie dollar rallied overnight on what was a generalised improvement in investor and trader sentiment as stocks rallied for the second day in a row. That’s taken the Aussie to just under 72 cents which is its highest level since late August.
The Aussie dollar has also broken above the top of a 5-month downtrend channel and also back above the trend line that stretches back to the GFC low at 0.5960.
That’s a bullish technical set-up, but in the past four hours, the rally has stalled as traders await some sort of further catalyst to push it higher. Of course that’s natural given the clock is counting down to the FOMC decision at 4am AEST tomorrow.
It’s the most anticipated Fed meeting in years and naturally holds the key to the next leg in the Aussie’s move.
Given the technical outlook, traders will already be looking more positively toward the Aussie. Add to that the fact that after running down below 69 cents recently and amidst a plethora of banks downgrading their forecasts for the Aussie dollar in 2015 and 2016, the short term speculative trading community is mega short the Aussie dollar.
They are going to be incredibly stretched if it can rally much through 72 cents.
In many ways, market positioning and the acute bearishness that the Aussie dollar market has just been through sowed the seeds for the current rally and would, in usual times, be enough for the Aussie to rally another cent or two.
But tonight’s Fed move looms large over the forex, and other, markets.
The question is whether the move rates or pass. But even then it’s more nuanced, as Morgan Stanley highlighted earlier this week with their easy to follow ready reckoner on what the Fed might do this week.
Whether the Fed tightens or not and what it says will help drive the US dollar and in turn the Aussie dollar over the coming day, days, and weeks.
The CBA’s economics team this morning said that they expect the FOMC to:
(i) leave the Funds rate target range unchanged at 0.0-0.25%;
(ii) cut its interest rate guidance for 2015 from two hikes to one hike;
(iii) cut its interest rate guidance for 2016 from four hikes to three hikes; and
(iv) cut its long run interest rate guidance by 0.25% to 3.50% (which we still believe is too high).
In Morgan Stanley’s parlance, that would accord with their 60% chance of a “dovish pass” and if correct would put the US dollar under pressure.
In a note to clients this morning, Westpac’s New York-based currency strategist Richard Franulovich said “the USD’s price action in recent days has not been overly compelling and the Fed may yet tip the currency lower if they delay lift-off”.
That will see stocks, and the Aussie dollar rocket.
Of course the Fed may surprise most and tighten in which case all bets for the Aussie dollar bulls would be off. But, for the moment, the Aussie dollar is setting up for a huge rally.
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