AUD/USD still headed for a test of lower levels

• AUD/USD consolidates the trade war and RBA driven downtrend.
• However, analysts still expect AUD/USD to head towards 0.65 on a 12-month view.

AUD/USD has been firmer in the latter part of the month of August, with the price stabilising and printing higher lows since the 6th August drop which rounded-off the steep decline from 18th July swing high up in the 0.7080s.

AUD/USD had been subject to the deterioration of the trade talks between the Chinese and US with questions over the Australian economy and whether the Reserve Bank of Australia was about to cut rates deeper below the 1% mark following two consecutive rate cuts prior to the most recent meeting where the RBA actually held.

"The pre-emptive nature of the central bank’s policy may have been partly aimed at pushing down the value of the AUD, which has dropped by 3.8% vs. the USD in the year to date,"

analysts at Rabobank argued.  

In light of such a notion, the Aussie has been able to stabilise in the absence of any fresh shock-horror trade-war headlines in the last number of sessions and prospects of the talks to recommence in September - However, bulls are not out of the woods yet.

Bulls not out of the woods yet

Despite the improved housing market conditions in the Australian economy, there have been some worrying signs in the labour reports and the economy is a far cry from coming anywhere close to the RBA's inflation target any time soon. China remains a huge risk considering the nation relies on 30% of GDP from doing business with the Chinese - There are still expectations of a rate cut from the RBA this year.

Yesterday, the minutes of the prior meeting where the RBA held revealed a cautious mood at the central bank. “Members judged it reasonable to expect that an extended period of low-interest rates would be required in Australia to make sustained progress towards full employment and achieve more assured progress towards the inflation target,” the minutes revealed.  

"Not only does weakness in the Chinese economy have negative implications for Australia and the AUD through various trade channels but the associated rise in risk aversion can also pressure the exchange rate," the analysts at Rabobank argued:

"Although Australia’s current account deficit % GDP has fallen, this can still increase the sensitivity of the AUD to bad news. We expect AUD/USD to head towards 0.65 on a 12-month view."

AUD/USD levels

The technical set-up has the pair coiling up in a tight spot towards the end of a symmetrical triangle with a declining ATR - which may equate to a break-out one way or the other - likely encouraged by some geopolitical event to shake things up again.