AUD/USD broke above the September high on Friday and closed at its highest level since 29 August
From a fundamental perspective, the monetary policy divergence story in AUD/USD has been one of my favourite tales this year. However, even if fundamentals continue to support that rhetoric, it’s looking less prominent than it was a couple of months ago.
You can say to some extent that the short covering in the aussie has contributed to a shift in perspective but the latest market view on the Fed is suggesting that dollar gains will be less rampant unless the Fed can provide assurances that they will hike well beyond what they perceive to be neutral rates.
But for me, the technical change in AUD/USD since the start of this month has been telling that the winds are changing in the pair. And last Friday’s break of the September high of 0.7315 may just be the beginning.
Buyers are well in control with regards to the near-term chart but they still have much work to do. Price is still sticking around the 0.7315 level and that’s making it tough to see an extension to the upside for now as the aussie is weighed down by the focus on US-China trade tensions.
However, unless price closes back below the 0.7315 handle today, buyers will have the right platform to build on a move back towards the 0.7400 handle and then the 38.2 retracement level @ 0.7447.
And at least for now, the monetary policy divergence story is taking a bit of a breather as the yields spread is creeping back in favour of the aussie over the past few weeks:
Couple that with stretched short positioning, key technical level breaks, and loss of dollar momentum, this may yet help AUD/USD recover some ground as we head into the closing stages of the year.
For me, I’m watching that 0.7315 level today, that will be key in telling whether the run to the upside here has legs.