AUD/USD could face selling pressure in the open, Evergrande story gains traction

AUD/USD could be in for a rough ride this week depending on the markets risk appetite surrounding the implications of Evergrande. 

AUD/USD ended Friday bounding from the lows of the day in a last-minute push by the bulls. However, for the week, the currency was down in a bearish close for the weekly candle. Closing at 0.7271, the price was down 0.3% for the trading day after falling from a high of 0.731 to a low of 0.7262. 

Risk-off markets in play

The US dollar has been in the driving seat of late with a resurgence pertaining to global risk apatite dwindling into the Federal Reserve blackout period last week.

DXY vs. S&P500

On Friday, for instance, MSCI's gauge of stocks across the globe lost 0.71%, while the pan-European STOXX 600 index. STOXX closed down 0.9% for a third-straight week of losses. So far this month, the STOXX is down about 2%. US stocks also ended sharply lower on a rollercoaster week. All three major US stock indexes lost ground, with the Nasdaq Composite Index suffering the biggest decline as rising US Treasury yields pressured market-leading growth stocks.

In the background, prospects for tighter fiscal policy due to tax increases and tighter monetary policy due to a possible shift in the US Federal Reserve's timeline for tapering asset purchases is weighing on risk sentiment which is a negative factor for risk currencies, such as AUD.

Domestically, the Delta covid variant has been playing its part as well. However, investors bought into the Reserve Bank of Australia's optimism in the last meeting. The glass had full scenario sees a bounce back in the economy when the nation is vaccinated and out of lockdowns that will result in tapering and higher interest rates in due course.  

For the week ahead, inflation is likely to be a major issue next week when the Federal Open Markets Committee holds its two-day monetary policy meeting. Market participants will be watching closely for changes in nuance which could signal a shift in the Fed's tapering timeline.

Evergrande risk for the open

However, the bigger story for the start of the week rests with Evergrande. Shares in embattled property developer China Evergrande,  which has two trillion yuan ($310 billion) in liabilities, facing an $80 million bond coupon payment next week, dropped 30% last week which has led to widespread speculation that it is on the verge of bankruptcy. For insight into this risk, read more here: 

• Evergrande: Risk-off tone for APAC, a USD win-win scenario, bad for AUD

However, the news has gathered traction this weekend which could impact the markets in the open, especially AUD. The director risk of collapse of the China property market to the Australian economy is two-fold.

Firstly, as by far the world’s largest importer of iron ore by an enormous margin, any significant reduction in Chinese demand would have significant ramifications for the Australian economic income from iron ore operations and for the federal budget. Secondly, Aussie real estate market would also feel the heat when Chinese investors who own Australian property are forced to liquidate their Australian property assets in order to cover bad debts.

Overall, in a scenario where a protracted crisis unfolds within the Chinese property sector, the Australian economy that is already struggling due to the covid lockdowns will be thrown into more scrutiny by investors. Consequently, this would be expected to be problematic for the Reserve Bank of Australia and therefore weigh on the Aussie. 

AUD/USD technical analysis

AUD/USD's Doji candle could lead to a move on either side of the highs and lows for Friday's business. However, with such negative sentiment circulating over the Evergrande news, 1) there are prospects for a stronger US dollar which could tip the price of AUD/USD over the edge, extending the current bearish impulse, and 2) there are direct bearish fundamentals in play for the Australian economy. Therefore, a break of support near 0.7260 could be on the cards for the open with the risk of a downside extension towards the 0.71 figure in the medium term and below for the longer term.