AUD/USD drops on China covid woes and hawkish Fed speakers supporting USD


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  • AUD/USD fell at the start of the week as China's covid spread, lockdowns and protests drive investors into safe havens. 
  • Iron Ore prices remain robust and have shrugged off China's covid woes. 
  • The Federal Reserve speakers on Monday fanned the flames of risks of higher for longer. 
  • US Dollar bulls move in for the kill and eye a break of 107.00, DXY. 

AUD/USD is flat as we approach Tokyo but is at risk of updates relating to China's coronavirus spread, subsequent lockdowns and protests thereof. The risk-off mood has been supporting a move into the US Dollar while a Federal Reserve, (Fed), speaker at the start of the week made hawkish comments, pouring cold water on the brewing sentiment of a Fed pivot. 

China covid woes

Global stocks ended lower on Monday as social unrest from China’s prolonged Covid restrictions weighed on investor sentiment. Local governments tightened Covid controls as cases surged, even though earlier this month Beijing adjusted some policies that suggested the world’s second-biggest economy was on its way to reopening. In spite of the readministered stringent measures, China's case numbers last week hit all-time records since the pandemic began. In the cities of Shanghai, Wuhan, Guangzhou and Beijing protesters were heard chanting ''down with XI''. 

On Wall Street, supporting a bid in the US Dollar and weighing on the high beta currencies, such as AUD, the Dow Jones Industrial Average lost 497.57 points, or 1.45%, to end at 33,849.46. The S&P 500 fell 1.54% to end at 3,963.94. The Nasdaq Composite finished down 1.58% to close at 11,049.50.

US Dollar bounces back to life, weighing on AUD

The US Dollar, as measured by the DXY index, clawed back earlier losses on Monday. At 106.74 the high, the index was on the way to testing the bear's commitments near 107 the figure as a hawkish Federal Reserve official laid out the case for further rate hikes. James "Bullard, president and CEO of the Federal Reserve Bank of St. Louis said that rates need to go higher to bring inflation down. ''We've got a ways to go to get restrictive on policy,'' he said hawkishly.

Looking ahead, comments from Fed Chair Jerome Powell on Wednesday will be scrutinised closely by investors looking for fresh signals on further tightening. This will come ahead of the end of the week's potential showdown even in the key US Nonfarm Payrolls data. Bullard also said today that a ''tight labour market'' gives the Fed a ''license to pursue a disinflationary strategy.'' At this stage, the Fed is expected to hike rates by an additional 50 basis points when it meets on Dec. 13-14. 

Australian macro is thrown a lifeline by Iron Ore

Despite the bleak outlook for the Chinese economy, Iron Ore, one of Australia's major exports, rose at the start of the week. ''Sentiment remains buoyed by recent measures to support the country’s beleaguered real estate sector,'' analysts at ANZ Bank explained. 

''The People’s Bank of China cut the reserve ratio requirement by 25bp on Friday, following the State Council’s suggestion that monetary tools will be used to maintain liquidity. China also removed restrictions on fundraising used by developers in the past,'' the analysts added. ''They will now be able to raise capital via equity markets that can then be used for debt repayments and acquisitions. This follows earlier this month the release of a 16-point plan which it hopes will boost the real estate market.'' 

China economic data will be key 

On November 20, China will release the NBS PMIs (for the month of November), in the Manufacturing and Non-Manufacturing sector.  Analysts at TD Securities said that the PMIs are likely to fall further due to the rising Covid cases and tightening Covid restrictions that likely weighed heavily.

''Additionally, property woes continue to pressure construction. High-frequency indicators have slowed. Meanwhile, both exports and imports continue to weaken. Separately, increasing Covid cases in high-risk areas will continue to weigh on service sector activity.''

AUD/USD technical analysis

Now on the backside of the trendline, in the 4-hour time frame, the price is carving out the downside in a series of bearish impulses:

Zoomed in on the same time frame, we can see that the price is correcting at support having broken 0.6650. Should resistance hold, at old support, then there will be prospects of yet another bearish impulse for the sessions ahead.  The 0.6580s guard 0.6550 and then 0.6500.

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