While bond markets are starting to price in the possibility of fewer hikes than originally thought, this is still a very fluid situation.
The Australian dollar has gone back and forth during the trading session on Thursday, showing signs of hesitation. Ultimately, this is a market that I think will see a lot of noisy behavior, mainly due to the fact that we are still trying to price and what the global economy is going to look like. Keep in mind that the Australian dollar is highly sensitive to the global economy, as the Australian economy is so heavily dependent on commodity exports.
The market has bounced quite significantly from the lows, but we are still very much in a downtrend from the past several months. The 0.70 level has been broken through previously, so it’s possible that we would see that level be targeted again on the downside. If we were to break through that level, then it’s likely that the market would go looking towards the lows again. On the other hand, if we were to break above the hives of the past week, it’s possible that this market could go looking to the 50 Day EMA.
Looking at this chart, we have a scenario where we are trying to recover, but it’s possible this has simply been a short-term bounce just to build up more momentum. If we get a sudden “risk-off” type of situation, then it is likely that the Aussie continues to drop much further. At this point, you need to pay close attention to the US dollar in general, because that could give you a “heads up” as to where we are going next. Keep in mind that breaking below the 0.70 level was rather important, so I think it’s going to be difficult to see this market suddenly change its tune. I think we continue to see a lot of volatility in choppy behavior based on the day-to-day rumor, and unfortunately, that is not going to change anytime soon. Not only will the Australian dollar suffer from this, but so will most other volatile assets.
The only way that I see this as a situation where we take off to the upside with any type of steadiness is if the Federal Reserve changes its complete attitude. While bond markets are starting to price in the possibility of fewer hikes than originally thought, this is still a very fluid situation.