AUD/USD climbs out of descending channel on trade talk and Fed optimism

  • AUD/USD is trading at 0.6869, in a range of 0.6832 and 0.6881. 
  • Trade talk prospects are supporting the bid in AUD/USD.

AUD/USD has recovered from the lowest levels since the Jan 2019 flash crash lows on trade talk optimism. Despite the RBA minutes of the June RBA Board meeting that showed the decision to cut the cash rate by 25bp was due to a revised assessment of spare capacity in the labour market and that the Board expects to ease policy further, the confirmations that US President Donald Trump and Xi will be at the G20 summit was enough to fuel a risk-on rally.  Subsequently, AUD/USD is currently trading on the bid and has stepped out of a descending channel resistance implemented from early June highs.  Chinese state media report sealed the deal for the Aussie when it too reported that President Xi had agreed to talk with Trump next week.

Next focus

Focus now shifts to Wednesday's FOMCmonetary policy decision. Markes may find relief on a dovish outcome which too can support the Aussie. Analysts at TD Securities summed up the outlook as follows:

  • The Fed should signal readiness to ease policy but stop short of committing to a near term cut.
  • They will likely stress that they are monitoring risks on the economy and taking appropriate action to sustain the expansion.
  • We expect the median 2019 dot to remain unchanged (reflecting a Fed on-hold) and the median 2020 dot to decline.
  • Rates: Treasuries likely to bear flatten modestly as the Fed doesn't commit to a cut, but leaves the door open instead.
  • FX: Stronger DXY but weaker broad USD, reflecting possible EM impact if rate cut narrative remains intact. 

AUD/USD levels

Analysts at Commerzbank noted that AUD/USD has been attempting to recover from its 78.6% retracement at 0.6857: "It remains directly offered below the 55-day ma at 0.7004, 0.7022 the June peak and the April peak at 0.7069. This targets the 0.6738 January 2019 low... "the December 2018 high is at 0.7394"



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