By Arnaud Masset
After a painful week, the US dollar started the week on the front foot, extending gains against most of its peers. The dollar index tumbled 2% last week amid a sharp appreciation of the single currency (+2.07%), the loonie (2.34%) and the pound (+2.41%). The Japanese yen was the sole G10 currency to lose ground (-1%) as investors returned to riskier assets, searching for yields.
Despite a solid performance last week, the Australian dollar was no exception this morning as it slid 0.22% against the greenback. The Aussie has been trading within a compact upside channel since May 9th, with AUD/USD rising from 0.7329 to 0.7712, a 5.20% ride. However, it seems the party is coming to an end.
Building approvals figures, which were due earlier this morning, came in well below estimates, contracting -19.7% y/y, or -5.6% on a monthly basis, signalling that the cooling in Australia’s residential housing market has become a trend. This contraction in new homes approval has two main effects.
On the one hand, the slowdown in construction will weigh on the economy in H2, while it was a solid growth driver over the last few years. On the other hand, it gives a breath of fresh air to the Reserve Bank of Australia, giving it the freedom to adjust freely its monetary policy, without having to worry about fuelling the housing bubble.
A key resistance lies at 0.7750 (high from March 21st), then 0.7849 (high from June 18th 2015). On the downside, the closest support can be found at 0.7566 (Fibo 38.2% on May-June rally). As reported by the CFTC, net long speculative position reached 21.95% of total open interest as of June 27th. A potential unwinding of those positions creates significant downside risk in AUD/USD.