AUD/USD bears put peddle to metal, clean break of daily trendline support opens 0.7105

Market volatility has picked up on Wednesday with the US dollar surging to fresh weekly highs despite the US debt ceiling risks as the Fed narrative reigns over market sentiment. The greenback, as measured against a basket of rival currencies, has soared to a high of 94.4320. At 94,359 it is 0.68% higher on the day, up from the lows of 93.672. In turn, AUD/USD is lower. 

AUD/USD is currently trading at 0.7188, down some 0.70% on the day so far after falling from a high of 0.7264 to a low of 0.7173 so far. The move is significant, as illustrated below under AUD/USD technical analysis. Meanwhile, there are risks on both sides of the Pacific for which the Aussie is up against.

AUD/USD up against many risks

Domestically, AUD has been pressured of late due to concerns over the relationship between Australia and China. This is something that has been brewing ever since Australia called for an investigation over the origins of the coronavirus that is so far responsible for 4.55 million global deaths and a global economic downturn. China responded in kind and vowed to “vigorously defend itself” against such an investigation by imposing punitive tariffs on a range of Australian goods that has already cost more than $6 billion in lost exports. 

Then delta hit, forcing Australia into another lockdown and the nation to catch up on its vaccine rollouts to try and stem the spread of a new highly contagion variant of the coronavirus. In turn, this forced the reserve bank of Australia to think twice about its monetary policy and quantitative easing taper, ultimately weakening the demand for the currency in global markets. Then, in a further blow, the Evergande and the power crunch situation in China threatens the Australian real estate economy as well as its biggest export to China, iron ore. 

''Iron ore resumed its downtrend as power constraints in China could prompt steel production cuts in many provinces,'' analysts at ANZ Bank explained. ''More than 80 mills suspended production for maintenance, according to Mysteel data.''

''This suggests mills are rationing their power demand despite strong steel profitability. Power limits could see companies pause production, slowing economic growth in Q4 2021. Further, Evergrande woes are still looming, adding uncertainty to the iron ore market,'' the analysts added. 

Fed risks turn the screw for AUD

Meanwhile, in the US, traders are getting set for a reduction in the US Federal Reserve's asset purchases by the end of the year and an interest rate hike that could come as soon as late next year. This is adding fuel to the AUD/USD bear's fire. Markets are also concerned the Fed will start to withdraw policy support just as global growth slows and that is denting risk sentiment, for which AUD acts as a proxy. All in all, the outlook for the Aussie is bearish and the following technical analysis supports such an outlook.

The wild card for markets

With that being said, the wold card in the forex space right now is the US Senate Republicans that on Tuesday blocking a bid by President Joe Biden's Democrats to head off a potentially catastrophic US credit default. Federal funding is due to expire on Thursday and the borrowing authority deadline is as soon as 18 Oct. The House Democrat leaders remain far short of votes they need to pass an infrastructure bill. The Senate GOP is still blocking the Dems' ability to raising the debt limit on the floor and say it needs to be done through reconciliation.

The extent of the economic costs of the debt limit binding, while assuredly negative, are enormously uncertain. This leaves a grey cloud over the market's risk sentiment. For the US dollar, it could go either way for the greenback tends to benefit from risk-off, but if markets lose confidence in the US, then that would be expected to hurt the greenback as investors seek out alternative safe-havens, such as the Japanese yen.  

AUD/USD technical analysis

Prior analysis

It was illustrated above in prior analysis that following the 61.8% Fibonacci retracement, the price has been resisted below the 21-day moving average and bears have been looking for a downside extension of the daily bearish impulse. 

The dynamic trendline support gave out yesterday and bears were encouraged to move in. The -272% Fibonacci retracement level of the correction comes in near 0.7190 which gave way to the 0.7160's near the -61.8% that has a confluence with the 20 Aug highs. Further out, the weekly targets are 0.7105 and 0.6990. 

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