Australian Dollar Forecast: Neutral
- The Australian Dollar has been crushed by a bullish US Dollar outlook
- Treasury yields climbed through last week with investors dumping the risk-free asset
- The Aussie is testing bigger-picture trend support. Will a break lower sink AUD/USD and AUD/JPY?
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The Australian Dollar pummelling continues going into the end of August with the US Dollar reigning supreme and Treasury yields stacking up the gains amid concerns around the outlook for China.
Global macro is back in focus for traders as the dynamics between markets appear to be running toward correlations of 1 and minus 1.
This is typically seen as a sign of uncertainty within financial markets as investors and traders disregard nuances between asset classes and head toward safer shores.
The question that many in the market are asking is, why is the US Dollar soaring?
The answer might lie in the headwinds that are impeding the Aussie Dollar. China is in a dilly of a pickle as they face anaemic growth prospects at the same time that several large property companies are defaulting on their debt obligations.
If they loosen monetary policy, it might ignite domestic growth but at the same time, dimmish the relative value of the Yuan.
In order to contain the Yuan volatility, official agencies might need to sell Treasury bonds, of which China hold over USD 800 billion.
The latest data of US Treasury holdings has revealed that China have been a significant seller of the securities through 2023, with the exception of March. That is the month in which the Yuan saw notable appreciation.
Last week the People’s Bank of China (PBOC) cut its 1-year medium-term lending facility rate to 2.50% from 2.65%.
Country Garden and Sino Ocean, two very large Chinese property developers, have defaulted on several offshore and onshore bonds this month.
The concept of contagion entered the markets’ lexicon after Zhongrong International Trust Co., a major player in China’s trust sector, missed several obligations to its clients over the past week.
Last Thursday, Evergrande, another large Chinese property company, filed for Chapter 15 protection in the US. Chapter 15 is similar to filing for Chapter 11, but for companies that have offshore interests as well as a US business.
Beijing has been talking about measures to boost its economy, but concrete actions are yet to materialise.
All this has provided a negative backdrop to the Yuan and the potential need for authorities to sell Treasuries in order to have US Dollars on hand to buy the Yuan.
The overall picture here does not look like changing anytime soon, but official announcements and changes in policy could see an uptick in wild price swings for AUD/USD in the coming week.
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AUD/USD MONTHLY CHART – THE BIGGER PICTURE
Looking at the monthly AUD/USD chart, the price is testing an ascending trend line that is part of a Symmetrical Triangle.
A clean break below that trend line might see bearish momentum unfold. Click on the banner above for more information about Breakout Trading.
Chart created in TradingView
AUD/USD DAILY CHART
AUD/USD made a 10-month low last week and has accelerated away from all-period daily simple moving averages (SMA) to the downside.
The price action has seen the SMAs begin to untangle themselves and this may indicate that bearishness might evolve further.
The failure to close below the trend line seen on the weekly chart and the prior low at 0.6386 could see a pause in the bearish momentum. A daily close below it may see a reacceleration of bearish momentum.
Until that happens, the 0.6365 – 0.6385 might provide support. Further down the prior lows near 0.6270 and 0.6170 may prove support.
Nearby resistance could be at the breakpoints near 0.6460 ahead of a cluster of breakpoints and prior peaks in the 0.6595 – 0.6615.
Chart created in TradingView
AUD/JPY TECHNICAL ANALYSIS
Since making a high at 97.67 in June, AUD/JPY has had three notable rallies.
An attempt to break above the initial descending trend line failed but another trend line is in place, and they may offer resistance near 94.90 and 95.20.
The previous peaks near 94.90 may also offer resistance.
Resistance could also be found at the prior peaks and breakpoints of 95.74, 95.85, 96.88 and 97.67.
Last Friday, AUD/JPY made a new low at 92.79 which was under a series of breakpoints and prior lows.
The price was unable to remain below these levels and it closed the week above them. It could set up the 92.80 – 93.00 area as a support zone.
Further down, support may lie at breakpoints of 92.30 and 92.44 ahead of the 50% Fibonacci Retracement level at 91.85 which is near the July low of 91.80.
Support might also be at 61.8% Fibonacci Retracement level at 90.50. To learn more about Fibonacci techniques, click on the banner below.
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Chart created in TradingView
— Written by Daniel McCarthy, Strategist for DailyFX.com
Please contact Daniel via @DanMcCarthyFX on Twitter