I wrote in my previous article, titled “Rebound In Aussie Dollar Imminent,” that the AUD (NYSE:FXA) was on the brink of a major rally. In the past week, we saw Australia welcome its sixth prime minister in 10 years, which makes the political maneuvering in House of Cards seem like child’s play.
“Glad I am not born in the Down Under” (Source: Google)
Scott Morrison narrowly won last Friday’s ballot among Liberal MPs by 45 votes to 40, and was sworn in as the nation’s Prime Minister in replacement of the ousted incumbent, Malcolm Turnbull. This leadership vote was the second in three days. Earlier in the week, Turnbull had survived another ballot initiated by former Home Affairs minister Mr. Dutton, but the second ballot was one too many bullets for Turnbull to take.
The markets actually reacted positively to the news, with the AUD gaining strength following Morrison’s victory. Morrison had served as the country’s treasurer for three years, and is viewed by the markets as unlikely to radically change the country’s economic policies. As seen from the hourly chart below, the AUD rallied close to 40 points – from 0.7240 to 0.7280 – when the news was released.
AUDUSD Hourly Chart
The AUD was to rally to close the week at 0.7320. As mentioned in my earlier article, I expected a stronger yuan coupled with a weaker USD to push the AUD higher. The former – a stronger yuan – was supplied by a Reuters report on Friday stating that the PBoC was planning to adjust its methodology for fixing the yuan’s daily midpoint so as to keep the currency stable. This caused CNH to strengthen against the USD, from a high of 6.90 on Friday to close the day at a low of 6.80.
USDCNH Daily Chart
The latter – a weaker USD – was supplied by Fed governor Powell during his speech on Friday’s Jackson Hole Symposium, where he said inflationary pressures were not causing the economy to overheat, which takes away the need for the central bank to accelerate its rate hike programme. His dovish message caught the market by surprise, causing the Dollar Index to close the week at the lows, as seen in the weekly chart below.
Dollar Index Weekly Chart
Trump has repeatedly called for a weaker USD, most recently railing against Powell’s aggressive rate hike ambitions, while at the same time accusing Europe and China of manipulating their currencies. It is clear that a strengthening USD has been largely negating the effects of the tariffs Trump has imposed on Europe and China. Whether he should be interfering with the decision-making of an autonomous central bank is another issue that can be debated in another article, but Trump is effectively making clear that he wants the USD weaker.
Revered bond investor Jeff Gundlach recently warned that net short positions in 10-year and 30-year Treasury futures are at all-time highs and the long USD trade is currently extremely crowded. What this means is that the market has massively bought into the Fed’s 3-4 rate hikes a year story, especially with members of the voting committee like Esther George dismissing Trump’s influence on her opinion that two more hikes are needed in 2018. Powell’s U-turn on Friday might be a curveball the market is not prepared for, and we could see an imminent squeeze in USD bulls.
As seen from the AUDUSD daily chart below, the currency pair recovered strongly on Friday to recoup most of its losses on Thursday, when Turnbull’s future was still uncertain. A more certain political climate in Australia could give a boost to the AUD, and should we see an overstretched long-USD trade unwind, AUDUSD could break out very strongly towards the psychological 0.75 level at least. For longer-term investors, my view from the previous article holds: buy AUDUSD with a take profit level at 0.78 and a stop loss at 0.71.
AUDUSD Daily Chart
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Be the first to comment