The Australian Dollar has had a very good late summer and early fall gaining 10.3 percent against the U.S. Dollar and recouping about half of the April to August collapse.
The spell broke today, with concerted profit taking driving the Aussie back almost to 0.9600. Though the fundamentals of the Australian economy remain relatively strong, particularly relating to the recovering Chinese economy, the rapid ascent of the past week will likely moderate awaiting further information from the mainland.
Today's combination of a wide and beckoning channel just beneath the trading level, a failed upside breakout and some seemingly negative Chinese news, brought out the profit takers in droves and gave the aussie a figure and a half drop, its biggest one day fall since July 30th.
Yesterday’s brief break of the upper channel border at 0.9708 to a high of 0.9731 set the stage for today's more volatile attempt. After the break failed the aussie subsided to just below the upper channel border as the market waited for the release of Australian CPI numbers. The quarterly figures came in at 1.2% vs. the 0.8% forecast and the year over year numbers were 2.2% vs. 1.8%. The dollar immediately surged from 0.9698 to 0.9758 despite the RBA's stated easing bias on rates.
The PBoC (People's Bank of China) then surprised the markets by not offering a 7-day reverse repo (repurchase agreement) on Tuesday following a pause in the 14- day repo last Thursday.
The monetary logic of the bank’s action relates as much to the delay in the Federal Reserve’s tapering of quantitative easing and the potential surge of liquidity into China as to September’s Chinese data showing stronger domestic growth. It is primarily a tightening of liquidity anticipating any inflows to the Chinese economy.
In economic terms it means the Chinese government is trying to keep the economy from overheating, especially from overseas investment and monetary flows. Its direct application to currencies is small but it is a warning to those expecting Chinese economic growth to accelerate. Lower or contained Chinese growth does have implications for the aussie.
That mildly negative news was enough to reverse the dollar's rise and sent it skittering back into the channel. Once the upper border was broken, profit taking stops took over and within an hour the aussie was back at 0.9650. Further gentler selling took it to 0.9607 before it bounced to close at 0.9620.
Chief Market Strategist
WorldWideMarkets Online Trading