Up, up and away!

Today the little battler – the Australian dollar – leapt over the US77¢ barrier, buoyed by strong Chinese trade numbers and as the greenback continued its recent weekly bearish trend.

In a moment we will show how the Aussie is now trading at a fresh four-month high – and up over 5% for the past two months.

It’s risk on!

And whilst some of that moved was spurred by bullish Chinese data — a major part was opposite the Fed’s dovish language.

Janet Yellen did what we thought she would – that is she is no hurry to aggressively hike rates nor take them too high.

And that’s great news for risk assets. 

Here’s the thing: 

Inflation is still sitting below the Fed’s 2% target level. And that’s likely to be the case whilst oil trades sub $60/bbl. 

Therefore, I expect the Fed to take a moderate (measured) approach to hiking rates.

We might see perhaps one more rate rise this year (at most)… but only if we see inflation get a little more traction. Not before.

Another nail in the (equity) bears coffin. 

Yield Differentials

The other thing to watch with respect to our currency’s respective strength is the gap between US and Australian 10-year government bond yields. 

For example, if the Fed continues to hike and the RBA holds (or even cuts given the dollars strength) — this will narrow.

A lower yield advantage makes the Australian dollar less attractive for foreign investors

Two months ago we saw the delta close to just 16 basis points, its lowest since March 2001, when the Aussie was trading below US50¢.

But it didn’t last…

Today the spread is now back at 37 basis points, offering more support for the Aussie. More in this in a moment when we look at the weekly trend for the US 10-Year… it’s bearish. 

Aussie Outlook… 

As always, the weekly chart tells all (anything less is too noisy)

Let’s update the price action and where we should expect overhead resistance: 

AUD/USD – Weekly – July 13 2017

If you have been attempting to trade the Aussie dollar the past 12 months – it’s been hard yards.

Harder to pick than a broken nose!

For example, in the weekly timeframe, we have seen no less than 7 shifts in trend!

In a word – the Aussie is what we call range-bound.

On the upper limit we are seeing strong resistance around 78.5c – and on the downside around 71.5c. 

And without our do-nothing RBA being not much than a global spectator… this isn’t likely to change.

From mine, you have to take a bullish bias on the Aussie.

However, I would expect any upside to be capped around 78.5c (ie limit of our range).

If it can bust through that level – then who knows?

One thing is for sure, the RBA will be very uncomfortable with the strength as that will be deflationary. 

And whilst I can’t see the RBA cutting rates anytime soon… ie more fire on a hot Sydney and Melbourne property market… they will be weighing their options.

Let’s see how much language they devote to the strength in the currency with their next statement… keep an eye out. 

US 10-Year Treasury… 

We talked briefly to the yield delta between the Aussie and US 10-Year Treasury… something currency traders will be watching.

To better dimension this – we need to look at the price action.

For example, the higher this chart goes, the lower the bond yield (and vice versa). 

For those who are new to understanding macro markets — the stronger the bond yield – the stronger the attractiveness of that local currency. 

Therefore, the question is are US 10-year bond yields like to rally (or fall)?

Looking at the chart above for the US 10-year — the price action pivoted recently (lower) – in turn sending yields higher.

However, bonds hit stiff resistance at the top of our distribution (ie 127.5 on our chart).

This is a distribution we have been watching since June 2013 (not shown in this chart).

The other technical observation was the “false signal” generated with the moving averages. Notice how things briefly turned bullish in June (sending 10-yr yields lower) – however shortly after reversed.

Last night the 10-year caught a bid (sending yields lower) opposite the Fed’s dovish language.

Note: if the Fed are hiking short term rates – this chart will likely fall. When the Fed are cutting rates (or buying bonds eg QE) – this chart rises sending yields lower. 

My personal view is this chart is likely to keep trending lower; ie seeing US long-term yields (and interest rates) higher.

This will in turn make the US dollar more attractive (longer term) than its Aussie competitor.

And whilst the USD is currently in a bearish trend… I expect it will find support before too long. For now though, we should respect the trend and expect more downside with the greenback. 

Putting it All Together… 

The Fed are going about their business in a very measured way.

That’s wise.

Yes they have raised rates recently (as expected) however rates are still zero (or negative) in real terms.

Things are very accommodative and likely to remain so.

Stocks (and risk currencies) rallied strongly after Yellen’s dovish language – which is what you would expect. And surprise surprise – the weekly trends for equities remains bullish.

The Fed have now underpinned their support. Sorry equity bears!

As we have been saying for (years) – short the US equity market at your own risk.

The trend will end at some point – but not yet.

… trade the tape

When investing in shares, you can lose you some or all of your money. The potential gains on my blog are based on investing in Australian and US markets and don’t include taxes, brokerage commissions, or other fees. It’s important you seek independent financial advice regarding your particular situation. For any investment, never invest more than you can afford to lose, and keep in mind the ultimate risk is that you can lose whatever you’ve invested. If in doubt – always seek independent financial advice.

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