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USDOLLAR Index Breaking 3-Week Range on Back of AUD/USD

USDOLLAR Index Breaking 3-Week Range on Back of AUD/USD

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- It's been anything but the usual suspects driving the USDOLLAR Index today - few Brexit headlines, little news about BOJ.

- RBA leaves open door for August rate cut, sends AUD/USD down.

- As market volatility stays elevated post-Brexit, it's a good time to review risk management principles.

In the post-Brexit world, one which has seen volatility across FX markets increase and risky asset whip around, there was one peculiar outlier: the antipodean currencies. Almost dismissing the impact on risky assets, both the Australian and New Zealand Dollars have remained elevated since June 23 as global markets shifted from a 'risk on, risk off' mindset to a European-centric one.

In part, the lack of sensitivity AUD/USD was showing (as a constituent member of the USDOLLAR Index) to Brexit and the surrounding hype may have been a limiting factor for the broader greenback gauge over the past three-weeks. Indeed, price action had been constrained below 12050 in the USDOLLAR Index despite a significant advance in USD/JPY and a lack of recovery in GBP/USD.

Like GBP/USD, which had been rallying until the BOE blew open the door for substantial monetary easing in August, AUD/USD's recent rally has been all but unchecked by the RBA until last night. The recent RBA minutes made clear that the door is open for another rate cut in August, due to the perception among policymakers that the labor market isn't as strong as it appears and there is a risk that the medium-term inflation goal isn't met.

After Friday's bearish key reversal in AUD/USD, coupled with the fact that the pair failed to retake the trendline going back to the 2001 and 2008 swings lows, it seems that the path of least resistance for AUD/USD may be lower again. Concurrently, with the USDOLLAR Index breaking its three-week consolidation on the back of AUD/USD, it's very possible that this sends a signal to the broader USD-complex; with Crude Oil below $47.50/brl, USD/CAD should remain on the radar as a potential breakout candidate to the topside above C$1.3150.

See the above video for a technical review of the USDOLLAR Index, EUR/USD, USD/JPY, and GBP/USD. If you haven't yet, read the Q3'16 Euro Forecast, "Euro Awakes to Brexit Nightmare; Time for a Turn in EUR/USD?"as well as the rest of all of DailyFX's Q3'16 quarterly forecasts.

Read more: Brexit’s True Impact on Euro Will be Felt via the Italian Banking System

--- Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

To be added to Christopher's e-mail distribution list, please fill out this form

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