By guest contributor Stuart Talman, Director of Australian Sales, XE.com
Another week passes with the Australian dollar confined to the range that has constrained price action for the past 4 months.
And whilst the current range supports AUDUSD sitting above 70 US cents, the currency continues to favour a downside bias as levels above 0.7150 proved elusive for Aussie dollar bulls.
The early stages of last week saw an improvement in investor risk sentiment with US equities and commodity markets rallying due in part to easing US recession fears and positive Brexit headlines. Current sentiment remains very cautious as growing global growth fears and the tick tock of the Brexit clock constrain meaningful gains.
This caution is evident in AUDUSD price action as key resistance levels shift down and a downside breakout appearing inevitable over the next few weeks. For Aussie dollar bulls, in recent weeks, 72 US cents posed the key hurdle to overcome to give way to further gains. As rate cut speculation has gained more momentum over the past fortnight, the Aussie has been unable to challenge previous resistance – 0.7140 now the roadblock. Failure to break through here over the next week would likely lead to the much anticipated and expected to move below 0.7000.
Yield curve inversion has been a hot topic over the past week – a scenario when short term yields are higher than long term yields due to the deteriorating outlook for future economic prospects. Investors are more willing to invest in shorter-term assets due to the lack of confidence in longer-term performance.
An inverted yield curve in the US has been a reliable indicator of a US recession, correctly predicting this several times over the past half dozen decades. There was a slight inversion of the US curve (3-year bond yields vs 10-year bond yields) last week and although not deep and yet to be protracted, the dynamic does have the effect of spooking investors.