WESTPAC: Here's why the Aussie dollar can't break convincingly above 77 cents

KIRILL KUDRYAVTSEV / AFP / Getty Images

For all the positives it received this week, the Aussie dollar, yet again, couldn’t manage to break convincingly above the US 77 cent level, an area that it has struggled to overcome since the start of August.

It had every reason to break higher — surging commodity prices and an acceleration in consumer price inflation that scuppered expectations of a near-term rate cut from the RBA. And yet it couldn’t do it.

For the moment, a convincing break above .7756 — its August 10 high — appears to be a bridge too far.

Sean Callow, senior currency strategist at Westpac, has being playing close attention to the recent price action, musing that whenever it gets above the 77 cent level it appears to suffer vertigo.

The daily chart below underlines the Aussie’s many failures at this level. Giddy indeed.

AUD/USD Daily Chart

Callow believes that the inability of the Aussie to make a sustained break higher is likely due to two factors — stretched long positioning among speculative investors as well as firming expectations for a US rate hike in December.

“Positioning is one headwind,” he says, pointing out long positioning from speculators now sits at the highest level seen since May.

“The Aussie could be running out of fresh buyers,” he says.

This chart below adds strength to this argument, with positioning now sitting at levels that have, on most occasions, led to a selloff in the Aussie in the past.

Alongside stretched positioning, Callow says it’s the second part of the AUD/USD equation, the US dollar, that’s holding the Aussie back.

“There is also the strength of the US dollar,” he says.

“Pricing for a Dec Fed rate hike is up to 67%, boosting USD against a wide range of currencies.

“This is likely to persist in the week ahead, meaning that 0.77 remains very difficult for AUD.”

“Very difficult.” Probably not the view that Aussie dollar bulls would want to hear.

Longer term, Westpac sees the Aussie continuing to weaken against the US dollar, forecasting that it will finish next year buying 68 cents.

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