AUD/USD: Fresh daily low and sinks to below the 61.8% Fibo target, now eyes turn to the 0.6850s

• AUD/USD has made a fresh low to 0.6941, piercing below the 61.8% Fibo at 0.6951 as risk off markets dominate the FX space, for the meanwhile.
• AUD/USD is currently trading at 0.6942, sinking within a range of between 0.7004 and 0.6941. 

A Risk off start to the week as US-China trade talks remained in deadlock over the weekend is damaging commodity-FX, EM-FX and benefitting the safe havens, such as the yen and CHF.

China has now retaliated with a plan to impose higher tariffs which have put markets on caution, expecting a prolonged stalemate, (China denying that they had reneged on any prior agreements. Liu He said such changes were “natural” and he said the remaining differences were “matters of principle” ie China is unlikely to make concessions on such changes), potentially signalling for a weaker CNY which would usually weigh on the Aussie as well. 

"We believe that China will allow CNY to adjust weaker as a counter to offset the impact of US tariffs rather than a pure weaponization on the broad USD,"

analysts at TD Securities argued. 

Meanwhile, Kudlow suggested that Trump and Xi could meet at the G20 at the end of next month, although that is still some way off.  Kudlow also said that China has invited Mnuchin and Lighthizer to Beijing for further talks. Either way, there doesn't seem to be a quick solution in sight and markets have adjusted positions to reflect that conclusion. The next risk with respect to trade headlines will be either from the US administration that is expected to give details of tariffs on a further $325bn of Chinese exports or from China that has promised retaliation, meaning we should be on alert for announcing further tariffs on US exports in the next couple of days, so far expected to kick in in June.1.

"We think the adjustment to a breakdown in trade talks will largely be observed in equities more than G10FX. We note however, that China is likely to allow a more managed depreciation in CNY. This should also pressure EM FX lower,"

analysts at TD Securities argued. 

The RBA will be factoring this prolonged trade spat with the US and given the recent disappointment in inflation in the first quarter, the RBA is likely to remain in neutral for longer. As far as positioning, AUD net shorts dropped back last week following the steady policy decision from the RBA, however,  However, an increase in risk aversion and fears regarding an escalation of UK/China trade wars, additional shorts will likely be reflected in this week's data.

AUD/USD levels

Analysts at Commerzbank noted that AUD/USD had been holding above the 0.6951 61.8% Fibonacci retracement, supported by the positive divergence can on the daily RSI. However, now that that level has been broken, eyes are now on 0.6857 78.6% Fibonacci retracement. On the flipside, "rallies will now find initial resistance along with the 55-day moving average at 0.7084 and will need to regain this for a viable shot at the 0.7207 February high to become likely," the analysts added.