Fed chair Janet Yellen all but locked in a December rate hike at the next FOMC meeting overnight which drove the US dollar higher and knocked the Aussie dollar down through the bottom of the 0.7450/0.7750 range it has been in over recent months.
NAB economist Tapas Strickland wrote in a note to clients this morning that “as Yellen’s comments hit the wires, the US dollar rose across the board by around 0.5%”.
Until then the Aussie had been doing reasonably well he said. But as a result of Yellen’s words the “Aussie was the underperformer” falling 1% for the second night in a row.
“Much of the weakness in the Aussie came after Yellen’s testimony so does not appear to reflect the soft labour market figures released yesterday,” Strickland said.
It’s all about the US dollar.
That’s important because in US dollar index terms the dollar has hit the highest levels since 2003. The Euro is down at 1.0625 this morning, below a trendline stretching back to 1999, while the Japanese yen has weakened so much USDJPY has risen to 110.24 – more than 900 points above the lows seen in Asia last week in the immediate aftermath of Donald trumps election victory. That’s USDJPY’s highest level since June.
US dollar strength is important because while it is not the only driver of Australian dollar moves it is a key input into fair value and currently a big weight on the Aussie.
CBA currency strategist Elias Haddad discussed the outlook for the Aussie in a note to clients this morning.
“Soft Australian employment conditions and weak wage growth have also raise odds of another RBA rate cut which is weighing on AUD. Nonetheless, Australia’s improving terms of trade and above-trend real GDP growth suggest AUD/USD is unlikely to sustain a move below 0.7300,” he said.
In the immediate term traders are watching the 0.7380/86 region today — and into the week’s end — as a sign on whether that run below 73 cents Haddad mentioned is imminent.
That level represents the last line of Fibonacci support from the Aussie dollar’s last big collapse — to 0.7150 — in May this year.
Here’s the chart: