AUD/USD: Bears eye a run to 0.6950/the 61.8% retracement, but still plenty to be bullish for as well

  • AUD/USD has been creeping lower and has penetrated below the 38.2% Flash crash lows/late Jan highs Fibo retracement target.
  • RBA has shifted gears and will likely remain on hold for the foreseeable future.
  • The surge in iron ore prices to 2-year highs as well as prospects of the Chinese stimulus plus Sino/US trade deal are supportive.

AUD/USD has been capped by the 200-D SMA for a third time since the mid-April 2018 multiple top highs. The pair is driven by forces relating to trade, Chinese growth outlook and dovish tones from both the RBA and Fed who have switched over to neutral.

Economic performances of both the US and China are priced although the US's economy has further to fall, likely due to previous interest rate hikes that will take effect as the fiscal boost fades - Thus, monetary policy tightening is expected come to an end in the US in the coming months.

Chinese policymakers, on the other hand, are likely to ease policy further as weak credit growth weighs on activity. Should a trade deal be done before the 1st March deadline, that should be a supporting factor for the Aussie in the near term, although a lot of the optimism is already priced into the stock market and a buy the rumour, sell the fact scenario, could come into play shortly after a knee jerk reaction. 

However, the return to a softer USD policy from the Trump administration as the fiscal stimulus ebbs, just as cumulative US financial tightening begins to bite and Chinese stimulus measures begin to bear fruit; the bias may switch positive for the Aussie. 

Moreover, when a trade deal of some description is agreed between the US and China the commodities complex would be boosted, supporting the Aussie - We have already seen iron ore prices at 2-year highs.

RBA to cut rates

On the domestic front, however, the downturn in Australia's housing market is expected to restrain consumer spending and weigh on dwelling investment over 2019 and 2020 which could lead to prospects of rate cuts from the RBA, potentially in 2019. 

AUD/USD levels

Analysts at Commerzbank explained that AUD/USD tries to stabilise around the late January low at 0.7077 but remains under pressure following its failure at the 200-day ma at 0.7281 and early November highs at 0.7302/14:

"The sell off has eroded initial support at the 0.7077 25th January low, but we would allow for losses to the 0.7022/15 October low and 50% retracement. There is potential for 0.6950/the 61.8% retracement, but we look for this to hold. Price action in January was exhaustive – the market charted a hammer (reversal). We have a TD perfected setup on the daily chart and a 13 count on the weekly chart. This suggests the down move ended at 0.6738."

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