AUD/USD What Goes Up Must Come Down

Essential Insights

Donald Trump announced his “once-in-a-generation opportunity” tax reform plans overnight, however, FX markets paid little attention. The Aussie was already trading around the mid 78’s having fallen from the early ’80s of last week. The move coming off a combination of the RBA governor’s comments that a rate rise was a while away and a general “risk-on” mode with the North Korean situation.

Technicals

The Aussie dollar has continued to fall after we identified the shooting star candlestick formation on Tuesday. We have moved well below the 14 day MA and RSI is approaching the pivotal 30 level- which would indicate the currency has been oversold. The currency is currently flirting with the key level of resistance at 0.78 22.  A break of this would be significant given it’s been the main support level for the last two months.

Fundamentals

Janet Yellen’s speech on Tuesday to was to the hawkish side with US Fed fund futures pricing in an 80% chance of a move higher at the FOMC’s December meeting.
 
However, US front end’s (US Treasury bond yields) are only pricing in 50 basis points of tightening in the next two years. Whilst Aussie bond yields are pricing in a 75 basis point rise at the same time.

It will be interesting to keep an eye on how this dynamic develops given the higher inflation pressures in the US and that most household debt in Australia is floating. Thus any Aussie rate rises will be very sensitive to consumption and growth.