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The Aussie Dollar Is A Proxy For All That Could Go Wrong In The Global Economy

Published 12/07/2018, 11:20 am
Updated 06/07/2021, 05:05 pm

Originally published by AxiTrader

  • The Australian dollar came under heavy selling pressure in the past 24 hour dropping from round 0.7470 before the tariff rumour hit to sit at 0.7362 this morning.
  • That loss of around 1 cent comes as traders access the Aussie dollar's deep pool of liquidity to express their worst fears about the impact on the Australian economy but equally, possibly more so, their worries about global growth as trade tensions escalte to dangerous levels.
  • The break of 0.7393 overnight leaves the Aussie open to a fall to recent lows around 0.7305/10. Should that break then 0.7170/7200 becomes the target zone

USD/JPY and gold may not have exercised their usual place in investors minds and in their trades yesterday when times get tough. Indeed the fall in gold and rally in USD/JPY were almost lockstep as the US dollar surged sweeping any notions of a safe haven bid aside. But while traders ignored usual protocols for these two assets they did observe the historical relationship between risk aversion and the Australian dollar by selling it aggressively.

There are a number of reasons for this as I outlined in the introduction and as I have articulated in recent weeks. It's as simple as saying the headwinds for the Aussie are strengthening as the trade war escalates.

But the Aussie is not just being sold as a result of those headwinds. It is also being sold as a proxy for the moves in Asia and of Asia's currencies. Take the relationship between the AUD/USD and the USD/MYR for example.

Yesterday I was asked on Twitter about my view on AUD/MYR by a fellow who's going on holidays to Malaysia with his family. My response was the usual one I give when asked about holiday currency hedging. That is, is it enough to worry about? Otherwise just enjoy your holiday and let your Master or Visa card and your bank sort things out. But I also pulled up a chart of the two currency pairs on a 10 minute basis for the past 30 days.

And voila...its a very close directional correlation. Evidence that the Aussie is moving with and being used as a proxy for Asia.

Chart

It's a similar story with the USD/CNY lately and likely one which is replicated in other pairs. That means the outlook for the Aussie is very much tied to the outlook for Asia, Asia's currencies, as well as the weakness in commodity markets like copper and other industrial metals. And of course with the US data flow continuing to suggest the Fed is on track for one, likely 2, more rate hikes this year and the RBA on hold interest rate support for the AUD/USD is lacking.

So the Aussie is back in its weekly downtrend and only 60 points from the lows. LIke the euro's ability to hold 1.15 there is no point getting to bearish at the bottom of the recent range. But if 73 cents does given way then the outlook is for a run toward 0.7170 as a Fibonacci projection of the recent rally up to ~0.7483 from the ~0.7305/10 low.

Short term support is here around 0.7360 but then it's the low with a full round-trip looking likely. Resistance is 0.7383, then 0.7410/15.

Chart

Have a great day's trading.

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