The correction of the US stock market will deprive the AUD/USD bulls of an important trump card
Beijing's attempt to stabilize the yuan by increasing reserve rates and foreign exchange interventions involving state-owned banks let the AUD/USD bulls take breath. Australia is regarded as one of the countries most affected by the trade conflict between the US and China, and the best Bloomberg forecaster for the Aussie based on the second quarter of the CIMB Bank is confident that the worst is yet to come for this currency. The slowdown in China's economy, worsening global appetite for risk, the divergence in the monetary policy of the Fed and the RBA, as well as the bearish outlook for the iron ore market, support the continuation of the peak of the pair.
The slowdown of China's GDP, the collapse of the Shanghai Composite and the yuan does not bode well for the Australian dollar. While Beijing and Washington are exchanging mutual threats and will not sit down at the negotiating table, the AUD/USD bears will not abandon the idea of breaking the lower boundary of the consolidation range 0.73-0.7485 in order to continue the journey north. In this respect, the intention of the Celestial Empire to bring the total amount of US imports taxed by duties to $ 110 billion is a clear negative factor for the Aussie. Hedge funds and other speculators increased net shorts for this currency to the maximum value for more than two years, although back in May it was a question of net longs.
Dynamics of the AUD/USD and speculative positions in the Australian dollar
China is the largest consumer of iron ore, so the forecast of the Department of Industry, Innovation and Science about the drop in prices from the current $ 66 to $ 51.1 per ton in 2019 does not look like an anomaly. The decline in the value of the most important item of Australian exports, along with the growing risks of a slowdown in the GDP of the largest trading partner of the Green Continent and the divergence in the monetary policy of the Federal Reserve and the Reserve Bank of Australia, allow Morgan Stanley to recommend its clients to sell the AUD/USD and AUD/JPY. The bank calls the development of protectionism the main bearish driver.
By August 10, the attention of investors working with the aussie will be riveted to the RBA meeting on Tuesday and to the report on monetary policy, which is expected to update the forecasts for key macroeconomic indicators on Friday. Taking into account the planned reduction of unemployment by the Reserve Bank to 5.25% by mid-2020, the futures market does not expect a raise in the cash rate earlier than in 18 months. By that time, the federal funds rate may exceed the neutral level of 2.9%, which will allow calling the Fed's monetary policy tough.
If we add to this the seasonal factor (since 1975, the AUD/USD has closed August in the red zone in 26 cases out of 43), then the situation for the Australian dollar seems completely hopeless. It is still clinging to the positive dynamics of the S&P500, which is usually associated with an improvement in the global appetite for risk, but as soon as the US stock market slows down, the thread the Aussie is hanging bywill disappear. The breakthrough of the support at 0.73-0.732 will increase the risk of continuing peak in the direction of 0.695-0.71.
Did you like my analysis? Please share it on social networks :)
You can ask me questions and comment on the article below. I will be happy to answer and provide explanations.
Real-time price chart of AUDUSD
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.