Over the last several sessions, we have seen the US dollar get hammered. This shouldn’t be a huge surprise, after all, markets cannot go in one direction forever. The US dollar has had a lot of reasons to continue strengthening for some time, but this past week’s Consumer Price Index got people excited. The reading of 0.4% instead of 0.6% month-over-month was lower than expected. This of course was something to celebrate, but to be honest – the Federal Reserve is nowhere near pivoting, or even pausing.
The reality is that the year-over-year CPI number was 7.7%, which is miles from the 2% region that the Fed typically aims for. Granted, markets pay a lot of attention to the rate of change, and try to “front run” the Fed, but they are notoriously bad at it, especially in times like these. Can the AUD/USD, (And other USD-related pairs) continue to go against the greenback? Sure. However, the underlying fundamentals haven’t changed.
The Australian dollar is highly levered to the Chinese mainland, and global demand for commodities as a result of demand from China. The reality is that as the stock market is driven higher, and the USD lower, this works against the moves of the Fed. They need the wealth effect to drop, to drive down demand. Because of this, I do not believe that the bear market in risk is over. Granted, we could continue to bounce, but I still think that pairs like AUD/USD have more downside.
The chart below is a weekly chart of that pair. Notice the 0.67 level begins to see some previous support. “Market memory” comes into play, and some resistance will appear. If we do continue, the Australian dollar could go to the 0.70 level above. Either way, the momentum should run out soon.