AUD/USD Forecast: The wind is still from the East

The substantial AUD/USD rally this week, capping a two-month return from the pandemic panic and almost two decade low in March, has reached a technical and possibly fundamental hold point. 

Even without the potential damage to the China sensitive aussie from the renewed Washington Beijing confrontation, now primarily on pandemic and political topics rather than trade, the two month AUD/USD surge to just under the panic drop-off point in late February would, in the absence of strong fundamental logic to move higher, probably engender considerable sell orders and a profit retrace lower.  

That technical rationale is compounded by the US-China dispute, which, even if it is papered over sufficiently to keep the trade agreement intact will likely cool Western interest and investment in China and limit the mainland’s own recovery even as many US manufacturers are looking to repatriate some of their operations.   

If the Chinese economy does not gear up quickly the drag will be felt almost immediately in the mines and farms to the southeast in Australia.

US pulls Hong Kong trade status

President Trump announced that the US will begin steps to remove Hong Kong's most favored trade status in response to Beijing's new security law for the former British colony which effectively bans political protest.  "I am directing my administration to begin the process of eliminating policy exemptions that give Hong Kong different and special treatment," said Mr Trump.  Hong Kong has been exempted from the tariffs imposed by the US on Chinese goods but Mr. Trump did not specify which steps would be taken or when and the future statius of the duties was not clear.

Financial markets reacted favorably to the announcement, relieved that the US did not take more punitive measures that might have included additional tariffs on Chinese goods or even withdrawing from the trade pact. 

AUD/USD outlook

The immediate AUD/USD direction hinges on three factors: the very sharp ascent since March; the 11 year resistance line at 0.6700 that saw considerable trading in the second half of last year; and the above mentioned US-China political and trade acrimony. 

If the two governments manage find a formula that lets the politics and rhetoric fade, the damage to the relationship, barely friendly but hopeful before the January trade deal was subsumed by the pandemic, will take many months or years to repair. 

The Reserve Bank of Australia has said that it expects the downturn to be less severe than it initially feared. Australia has one of the lowest fatality counts from COVID-19 among advanced nations and has started reopening its economy barely halfway into the six-month shutdown originally envisioned by the government.  

Still, RBA governor Philip Lowe called the outlook “uncertain” suggesting that interest rates will stay at their record low of 0.25% for a long time.

The problem for the Australian economy and the AUD/USD remains its close association to the People’s Republic.  

Unless there is concrete evidence from the mainland of rapid growth, the aussie could be a resource currency without resource buyers.

Australia statistics May 25 - June 5

US statistics May 25 - May 29

US statistics June 1- June 5

AUD/USD technical outlook

The technical view is dominated by the resistance border at 0.6675-0.6700. It is well established by repeated contact from August through October last year and again from January through the pandemic collapse in late February. The brief recovery in early March also halted here. 

The relative strength index is close to overbought and reinforces the technical position at 0.6700. All three moving average have been crossed in the run higher. The 21-day and 100-day on May 18 and the 200-day each day this week from Tuesday on, though the only close above it was on Friday. 

Resistance: 0.6675-0.6700; 0.6750; 0.6800; 0.6865; 0.6925

Support: 0.6610; 0.6570; 0.6505; 0.6450; 0.6400

Reuters

AUD/USD sentiment poll

            The uniform bearish view across all three timeframes reflects the technical and fundamental problems for a stronger AUD/USD.  The outlook is not just for a rebuff at 0.6700 but for a substantial reversal, though probably not a new lower trend.  The one caveat to the pessimistic view would be a renewed and reinforced US China trade arrangement.