Geopolitical Uncertainty Favors USD HistoricallyWhile the U.S. dollar has witnessed elevated volatility this week and at the back end of last week, p
Geopolitical Uncertainty Favors USD Historically
While the U.S. dollar has witnessed elevated volatility this week and at the back end of last week, prices remain well above 9700. In times of geopolitical uncertainty investors and money managers have favored liquidity and safe-havens and the dollar boasts both of those desirable characteristics. In addition, US treasuries have strengthened massively today which tends to support USD valuations
USD Treasury Yields (2, 5, 10 and 20 year)
Source: Tradingview, prepared by Richard Snow
Reserve Bank of Australia (RBA) Maintains Dovish Stance
The RBA voted to maintain interest rates at 0.1%, noting that the Russia Ukraine situation presents a new major source of uncertainty. Previously, the RBA stressed that loose monetary policy will remain for as long as is absolutely necessary to support the Australian economy. This is in stark contrast to the Federal Reserve Bank which is all but certain to hike rate later this month by 25 basis points as the recent conflict has drastically lowered the chances of a 50 basis point hike.
The Aussie dollar benefitted from the re-opening of the global economy as China’s appetite for Australian commodities soared. As such, AUD witnessed close correlations to other risk assets, particularly the S&P 500 equity index which is now coming under pressure. Should the Russia-Ukraine conflict escalate further, AUD could become susceptible to the downside as other risky assets have turned lower.
Aussie Dollar Heavily Shorted Despite Recent Resilience
According to the most recent commitment of traders (CoT) report, speculative traders – often large speculators and hedge funds – remain heavily net-short. From March 2019 to March 2020 shorts largely outweighed longs as AUD/US traded lower over the period before the sharp drop experienced as the coronavirus spready throughout the world.
AUD Longs, Shorts, and AUD/USD Overlay
Source: IG, prepared by Richard Snow
AUD/USD Range Trading Setup (1-4 Days)
From a technical perspective, AUD/USD has approached and respected a particularly significant area of confluence. In January of this year the pair, trading in a similar channel to where it is now, traded lower after rejecting the 0.7300 zone of support (red). Today we saw a failed attempt to reach tat very zone but on closer inspection there is more to consider. The area of confluence consists of the zone of support, the long-term trendline support and the upper bound of the ascending channel.
If today’s rejection is anything to go by, we could see a move towards 0.7220 and a potential move towards the recent lows around 0.7170. Keep in mind that the recent increased volatility poses a threat to range trading opportunities which underscores the importance of risk management with this setup
AUD/USD Daily Chart
Source: IG, prepared by Richard Snow
— Written by Richard Snow for DailyFX.com
Contact and follow Richard on Twitter: @RichardSnowFX
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