AUD/USD: profit taking to ensue or open wounds all the way to the 0.6900s for Asia?

  • AUD/USD is possibly making a bottom here after a whitewash on Wall Street and risk that has nocked the wind of the bull's sails and lungs for that matter.
  • AUD/USD has dropped to a low of 0.7069 from a high of 0.7130 and is testing the bull's commitments at R1 as US sticks decline by the largest margin since February's incredible turmoil.

Casting minds back, Feb's crash was all about inflationary risks in the face of a strong US economy and an untold amount of interest rates hikes on the way from the Fed. Back then, the Dow crashed more than 3,200 points, or by 12%, in just a couple of weeks when the inflation cat was let out of the bag. Today, the Dow cash dumped from 26508 down to 25492 when including electronic futures and Extended Hours Trading. For the session, the DJIA lost 831.83 points, or 3.2%, to settle at 25,598.74, in fact, logging its worst one-day drop since February - Recalling though that stocks then raced back to life, and at one point, they were recovering about three-quarters of those losses. However, the Dow then tumbled 680 points during the month's final two days, leaving it down about 1,600 points from the record high in late January. 

All eyes on China

So, what might prevent such a snapback recovery as was seen back in February and again a steadier recovery that began later in early March? At that time, markets were panicking over Fed rate hikes, but now we are living in that reality and indeed, the markets have adjusted to a slow and gradual path of hikes. However, now the market is concerned about not only inflation but a slowdown in economic growth as well, stemming from Chinese markets of which equity contagion has finally hit Wall Street.

Weak data from China weigh on the macro outlook and the IMF have warned that the global financial stability risks are rising with trade tensions - The organisation recently cut the global growth forecast from 3.9% to 3.7%. With respect to trade wars, we are clearly some distance from a resolve between Bejing and Washington's dispute and Trump said recently that China is not ready to reach a trade deal - Once the market really starts to focus on the alleged Chinese state-sponsored hacking, that's when the thing will really turn ugly.

First, the CSI 300 will be monitored today which has been in free fall - 3,200 is the level to watch and we are not far from it - Should 3,200 give out, we are looking at the potential for a subsequent test of the week commencing 10th Sep lows at 3,191. 

AUD/USD levels

As for the Aussie, USD/CNH will be one to watch today in Asia. USD/CNH has already hit a high of 6.9358. 6.9400 guards a run to 6.9590 double top highs and that would send the Aussie into a tailspin - too tough to pick a bottom, but a break of S3 at 0.7010 opens the case for the 0.6786 on the wide. 

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