Certainly the massive buying spree of emerging market currencies yesterday has been a big incentive to buy AUD’s, as it lowers the need for the corresponding central banks to have to use their currency reserves to support their domestic currency (thus in turn selling USD’s). What has been happening of late was emerging markets central banks would subsequently have to top up depleted USD reserves by selling AUD/USD, EUR/USD and GBP/USD.
The Fed is happy to keep the stimulus (bond buying) constant and is keen to flatten the yield curve by bringing down longer term bond yields. This subtracts from the USD, given the role yield spreads play into currency valuations. Real rates (i.e bond yields minus inflation) have also fallen as a result of markets re-pricing easier conditions. Looking forward, in US trade we get speeches from Ester George (a current voter), Daniel Tarullo (voter), James Bullard (voter) and Narayana Kocherlakota (a voter in 2014) and traders will be keen to hear what they have to say about the FOMC meeting, although we currently have a decent idea of how they are positioned already with regards to a dovish/hawkish stance.
Technically the AUD/USD has pulled back to 0.9437 (at the time of writing); having failed to close above the 38.2% retracement of the year’s high to low at 0.9510. The daily stochastic oscillator has shown divergence, although we prefer to see triple divergence, which can be a powerful indicator that the buying is exhausted. The indicator is also at extreme highs and giving a clear overbought reading, although the daily RSI is not at extreme levels at 64 (after the overnight pullback). The MACD is still above zero, indicating pullbacks could be contained within a bullish trend.
A pullback would be healthy, and we feel a good entry point for AUD bulls would be 0.9450. Traders could look to add to longs on a daily close around 0.9510, although the clear risk for the trade would be increased currency fighting rhetoric from the RBA, an improvement in US employment again or a major risk-off event caused by a shut down in the US, subsequently causing commodities to fall heavily.