AUDUSD's "Spidey Sense" is Tingling

Much like my wife, markets almost never give clear, unambiguous signals. Last week’s surprise decision by the PBOC to cut interest rates for the first time in more than two years provides the perfect example. Immediately following the decision, traders bid up the AUDUSD, reasoning that more stimulus in China should benefit the country’s imports and by extension, trading partners like Australia and New Zealand.

However, an opposing narrative has emerged this week, helped along by RBA Assistant Governor Philip Lowe’s comments last night. In comments at an Australian Business Economists dinner, Lowe hinted that commodity prices may continue to fall and that the Reserve Bank of Australia stood ready to cut interest rates further if required. Most have attributed these comments to typical “verbal intervention” to drive the AUD lower from the RBA, in-line with its actions over the last few years. That said, these new comments have caused some traders to ponder whether China’s surprise interest rate cut could have been prompted by an upcoming negative shock from the world’s second-largest economy, a slowdown that may also be starting to show up in Australia’s economic data.

While we hesitate to venture too far down the rabbit hole of speculation, a major disruption in Chinese economic growth, if seen, could lead to a steep drop in the China-dependent Australian and New Zealand dollars, among other currencies. It would also stoke safe-haven demand for currencies like the US Dollar and Japanese yen. The recent developments in the Asian-Pacific region have the proverbial “spidey sense” of some traders tingling, so readers should closely monitor economic data out of China and Australia the next few weeks to see if it corroborates this fringe theory.

Technical View: AUDUSD

Not surprisingly, AUDUSD has dropped on the back of RBA Lowe’s dovish comments. As we go to press, the pair is testing support at the 127.2% Fibonacci extension support of Friday’s bounce at .8523, but a developing technical pattern suggests that a much stronger level of support sits down at .8470.

That level marks the convergence of the 127.2% Fibonacci extension of XA, 161.8% extension of BC, and the AB=CD pattern off the monthly highs. The confluence of these leading technical support levels creates a Bullish Butterflypattern, suggesting a higher probability of a bottom if rates drop down to pattern completion at .8470. Bolstering the bullish case, the RSI indicator is already oversold raising the probability of a rally off support. In the near term then, a deeper pullback is possible, but buyers are likely to emerge if rates dip below .8500 later this week.

Source: FOREX.com