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AUD/USD Down Under $0.7000 as HY, EM FX Pressure Remains

AUD/USD Down Under $0.7000 as HY, EM FX Pressure Remains

2015-09-02 10:41:00
Christopher Vecchio, CFA, Senior Strategist
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Talking Points:

- AUDUSD dips below $0.7000 for the first time since April 2009.

- USDOLLAR Index aims for retest of range top near 12070.

- See the DailyFX economic calendar for Wednesday, September 2, 2015.

As equity markets around the globe struggle to find solid footing amid mounting concerns over Chinese economic growth, the US Dollar has seen a number of forces come into play to influence the direction of the broader USDOLLAR Index. While the pause in European equity market selling may have quelled short covering in EURUSD, and similarly a lack of further downside in USDJPY, other non-equity market-centric pairs are maintaining price action commensurate with trends established over the past several weeks.

For the AUDUSD in particular, fears of economic growth being choked off due to a broader slowdown in China and emerging markets seem to be coming to fruition, with the latest Q2'15 Australian GDP report showing a slowed pace of growth, both relative to Q1'15 and expectations for Q2'15. As the market builds towards the September 17 FOMC policy meeting, there's decent reason to believe that AUDUSD can maintain its move below $0.7000 in the interim (having started its attempt to settle at its lowest levels since April 2009 today).

USDCAD is an interesting story as well, given how 'right' things could have gone for the Canadian Dollar the past few days and how 'little' actually transpired. The Loonie, which has been under pressure all year due to declining economic growth, low inflation, and weak labor reports, failed to take advantage of a massive swing higher in energy prices in recent days: USDCAD fell back just over -1.5% from its recent higher during crude oil's gain in excess of +20% over the past week. Elsewhere, as the Canadian economy entered a recession in Q2'15 (per yesterday's GDP report), the depth of the contraction seemed to be less shallow than markets were anticipating.

This seems like a missed opportunity for the Canadian Dollar with developments that could be classified as 'less worse than expected,' but a greater truth may be revealed: the erosion of energy prices is making a deep cut into Canadian growth potential, and only a prolonged rebound in crude oil prices will have a meaningful impact as a bullish driver for the Canadian Dollar. With Canada heading to the polls for the federal election in six weeks, any further weakness in growth will have to be countered by the Bank of Canada, through either forward guidance or substantive policy action; in either case, growth-positive stimulus measures seem unlikely to emerge from fiscal authorities in the interm. A prolonged slump in energy prices plus a dovish-leaning BoC makes for a bearish outlook for the Canadian Dollar.

See the above video for technical considerations in AUDUSD, EURUSD, USDCAD, and the USDOLLAR Index.

Read more: USDOLLAR Index Lacking Uniform Theme as Risk Sours

--- Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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