There is nothing like a risk rally to lift the Australian dollar

There is nothing like a risk rally to lift the Australian dollar

There is nothing like a lift in investor sentiment to lift the Australian dollar out of whatever doldrums it may be in.

Such was the case yesterday when base metals started rallying, stocks across Asia were doing better and a general shift in the previous two days mood toward a positive outlook helped the AUDUSD lift back above 75 cents.

That’s seen the Aussie go from the back of the G10 pack to being one of the best performers over the past 24 hours. It’s trading at 0.7525 now. That’s off the overnight high around 0.7546 but still a pretty solid performance.

Naturally where it is in two or three trading days depends on the outcome of the French elections. But equally the comments from US Treasury secretary Steve Mnuchin on the release of trump tax cuts was an important intervention against bearishness in markets and the waning faith in Trumponomics.

Mnuchin said the tax cut plan will be released “very soon” and noted it will be “sweeping, it will be significant and it will create a lot of economic growth”. 

That’s exactly what traders the world over, looking for the stimulus of Trumpflation wanted to hear. But in many ways I thought Mnuchin’s comments on health were even more important.

less than a week ago Mnuchin had intimated in an FT interview that health care needs to be settled before tax cuts could be looked at. but last night he said “Whether health care gets done or health care doesn’t get done, we’re going to get tax reform done”.

It will still take time to get through Congress. But it’s a signal the administration does not want to get bogged down.

Why am I talking about US tax cuts in an Aussie dollar piece? Simply because if traders want to be positive about same and take stocks higher, if bonds get sold off on the news, and if there is a general sense of increased risk appetite then that is a net positive for the Aussie dollar.

It can’t lift the Aussie dollar on its own. Things like growth, interest rate differentials, the US dollar, and technicals are also in my 5 key drivers. But as that shopping list suggests often some of those drivers are coincident with a rise – or fall – in risk appetite.

Now one night, as one swallow, doesn’t herald a change of season. But the price action reinforces to be the importance of this 0.7470 region for the AUDUSD.

As I noted yesterday Around 75 cents the Aussie is still not exactly weak. Not against the US dollar or the crosses in aggregate this year. But a push down, and through, the recent triple bottom on the daily charts might signal a deeper move. 

But it’s holding for now.

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About the Author

Greg McKenna

Greg McKenna

Greg is a trader, behavioural finance/economics guy and technical analyst. His trading methodology is based on a combination of these factors, more than 25 years experience of profitable trading and simple common sense money management and trade execution techniques.