AUD/USD: Pressured on deteriorating liquidity and political stability in Washington

• AUD/USD drops steeply as US dollar picks up on positive political news from Washington.
• Risks seem skewed for further AUD underperformance.

AUD/USD dropped from the 0.72 handle down to session lows of 0.7170 following a broad-based spike in the greenback that travelled from 96.73 to 97.09 as the Washington Post reported that the White House will back down on Trump's border wall demand, averting a government shutdown as the Trump administration will look for other ways to fund the border wall. 

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US stocks have already started to recover on Tuesday following a horrible start to the week yesterday, which would usually support high beta currencies such as the Aussie, although, at this stage of the game, while the market might be set for a dovish hike from the Fed, anything remotely positive for the US economy is going to sway in favour of the US dollar, especially considering the narrative around the Australian economy that has soured considerably this month.

Soft Q3 GDP growth and downward revisions reinforcing existing unease over the slide in house prices keep Aussie contained

The Soft Q3 GDP growth and downward revisions reinforcing existing unease over the slide in house prices and tightening credit conditions have lowered the bar for an RBA rate cut and if it wasn't for the unemployment rate at a 6 year low, the timings of such an outcome could be brought forward. At the same time, risk appetite remains highly fragile on the eve of the final FOMC rate hike of this year which remains dollar supportive with liquidity is deteriorating.

"A weak US growth outcome, in the context of an already weak global pulse, would have a big impact on risk appetite; and a shift in the Fed’s tone is unlikely to provide an immediate offset, given that past policy tightening will still be having an impact," analysts at ANZ Bank argued, adding, "This provides a relatively solid base for the USD, particularly against other risk currencies like the AUD and NZD."

AUD/USD levels

AUD/USD has fallen from resistance levels through R2 that are barricaded by the 50 4hr SMA. The sharp drop took on the pivot point at 0.7182 and pierced the 23.6% Fibo of the recent highs and lows of last week where the price has now stabilised. A close below there, at 0.7174, (cloud support area) would be significant as we move into the Fed.  

"Failure here has left the market on the defensive and suggests scope for losses to the previous channel at 0.7125 and potentially a retest of the 0.7022 recent low. Currently, however, we would allow for the previous channel to continue to act as support. We regard 0.7022 as an interim low," analysts at Commerzbank argued, adding, "We have TD support at .6995 and below 0.6995/75 targets 0.6827 the 2016 low. Rallies will need to regain the September and early November highs at 0.7302/14 to reassert upside interest to the 200-day ma at 0.7393).