Originally published by AxiTrader
Chinese markets are on edge with stocks now down around 20% from their highs and the yuan under serious downward pressure.
That's not an environment where the Aussie dollar would usually do very well. But for the moment developed market equities and currencies seem inoculated to the Chinese market ructions, the signal that the weekend's RRR cut gives about the outlook for Chinese growth, and a clear message that the trade battle is likely to be protracted.
Of course, a large part of that is the Trump Administration showing its glass jaw on stocks' reaction to the trade battle after both Treasury Secretary Steve Mnuchin and trade attack dog Peter Navarro were rolled out to stop the market fall two nights ago.
And then overnight President Trump seemed to pull back from an aggressive set of rules around tech investment by foreigners in favour of letting the existing rules and committees do their job, which also seemed to imply the Administration fears a market reaction more than it does a Chinese or European response to its policies.
That enabled stocks to lift a little. And it also enabled the US dollar to again find its footing and push currencies lower across the forex leaderboard - developed and emerging markets.
And that pressure sees the Aussie dollar back down at 0.7389 as I write this morning.
While it’s fall was a little less than the euro and the US Dollar Index move the reality is that with the swoon in Chinese markets, fall in copper, and growing uncertainty about the global and local economies the downsides seems to be the beacon that attracts the strongest.
So, as we’ve seen for some time now the AUD/USD remains offered on any rallies of substance.
The question now, of course, is whether the lows around 0.7345/47 can hold or whether the next leg of the Aussies fall is beginning.
I won’t over-egg it, because like the euro the lows have to give way to get the bears raging again. Add in the fact the market is now carrying its shortest position since late 2015 and you see the issue and headwind for further falls. But there are plenty of position limits left to sell based on history.
So, with the copper price suggesting a fall for the Aussie to 0.7350 my sense is we’ll get a chance to see the Aussie test its lows.
If 0.7340 breaks then the 138.2% extension is 0.7215/20. The low has to break first though. Resistance is 0.7429 at the moment on the 4 hours.
