AUD/USD: All is well for bears targetting 0.68 handle, so long as the 21-SMAs hold across multiple time frames

European and US markets are following on the coattails of China. There seems no end in sight to the on-going last quarter angst in 2018 markets as the US prepares for the mid-terms. The Republicans are going to have a hard time selling, 'It's just a healthy correction' and 'perfectly normal', or, 'there is nothing to be alarmed about' - Not at least with the DJIA plunging 500 points in any given day. 

From a technical perspective, it doesn't seem too likely that the markets can recover significantly in time for the elections that are on the 6th of November. The DJIA has just broken below a significant support trend line at 24896, (the Oct low), and is now at the lowest levels since July of this year. Also, now that the Fed has raised rates eight times and began winding down QE last October, the return on risk-free assets has begun to rise, and Richard Koo is chief economist at Nomura Research Institute argued, "will reduce the amount of money flowing into more risky stocks and real estate. In my view, the biggest cause of the recent stock market volatility was the fact that the Fed’s latest rate hike took the US 10-year Treasury yield over the key psychological level of 3% for the first time in a long time, prompting a reverse portfolio rebalancing effect."

Indeed, while the US economy is motoring ahead, but the divergence could be highly problematic for key components the macroeconomy which will only slow up the progress that the US economy can make, and more likely, expose fragility in the US economy which could lead to more than just, 'a healthy correction,' which is what investors are also fretting over. 

However, with respect to AUD/USD, the question is whether the outlook for the US economy can keep pulling in investment and support the dollar in the medium term and if the consensus is no, then where else can investors park their idle capital in the meantime? EMs are not likely to be considered as cheap when there are so many risks, and Europe is awash with political uncertainties. Therefore, the dollar likely has further to run in the near term, with geopolitical risks, the RBA on hold, the Fed hiking until they can agree on a neutral rate and an appropriate time to stop, (no real word of that yet), and a US dollar shortfall in the EM space, all are supporting the case for AUD/USD towards the 0.68 handle.  

Eyes on EM-FX

For the meantime, the US dollar can attract a haven bid on money flows, and this is where the USD/CNH can keep testing the 6.95 handle. Overnight, the high was 6.9518, but once again bulls ran into offers, and the Chinese currency rallied back to 6.9373 which as supportive of the Aussie. In the absence of anything domestic, AUD is taking its cues from EM-FX and the general market tone and this week's rate decision by the Turkish central bank will refocus attention on the lira and contagion risks. 

The Aussie wants to see the Lira cross over the 5.00 mark vs the greenback on good news from Turkey, which is an unlikely scenario considering how much bad data we have seen of late where rates of 24 percent are strangling the Turkish economy. Should we see a correction to the upside in USD/TRY, 6.00 would be a line in the sand which would once again weigh on the Aussie.

AUD/USD levels

Analysts at Commerzbank explained that AUD/USD is also struggling on a technical basis:

"Intraday Elliott wave counts have turned negative, and downside risks are growing. We look for gains to remain capped by the 55-day moving average at 0.7215 and the .7284 2018 channel, and this will leave the market under overall pressure. Below 0.7040 would target TD support at 0.6995. Below 0.6995/75 targets 0.6827 the 2016 low."