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AUD/USD Rebound Unravels as China Pledges to Retaliate to U.S. Tariffs

AUD/USD Rebound Unravels as China Pledges to Retaliate to U.S. Tariffs

David Song, Strategist

Australian Dollar Talking Points

AUD/USD gives back the advance from earlier this month as China pledges to retaliate to an additional $200B in U.S. tariffs, and recent price action raises the risk for a larger pullback as the exchange rate snaps the series of higher highs & lows from the previous week.

Image of daily change for major currnecies

AUD/USD Rebound Unravels as China Pledges to Retaliate to U.S. Tariffs

Image of daily change for AUDUSD

The growing threat of a trade war may continue to sap the appeal of the Australian dollar as it clouds the economic outlook for the Asia/Pacific region, and the ongoing spat between the U.S. and China, Australia’s largest trading partner, may keep the Reserve Bank of Australia (RBA) on the sidelines as ‘one uncertainty regarding the global outlook stems from the direction of international trade policy.’

As a result, the RBA may merely attempt to buy more time at the next meeting on August 7, and Governor Philip Lowe & Co. may continue to endorse a wait-and-see approach for monetary policy as ‘the low level of interest rates is continuing to support the Australian economy.’ With that said, the lack of urgency to lift the official cash rate (OCR) off of the record-low may continue to produce headwinds for AUD/USD especially as the Federal Open Market Committee (FOMC) looks poised to deliver a 25bp rate-hike in September, and the pair may continue to track the bearish trend from earlier this year as Chairman Jerome Powell & Co. warn that ‘it would likely be appropriate to continue gradually raising the target range for the federal funds rate to a setting that was at or somewhat above their estimates of its longer-run level by 2019 or 2020.

Image of IG Client Sentiment for AUDUSD

Keep in mind, the IG Client Sentiment Report shows traders have been net-long AUD/USD since June 5 when the exchange rate traded near 0.75665 even though price has moved 2.4% lower since then. Nevertheless, net-long positions continue to narrow from recent highs, with the number of positions 8.1% higher than yesterday and 4.2% lower from last week. At the same time, the number of traders net-short aussie-dollar is 14.5% lower than yesterday and 1.1% higher from last week as the recent rebound in the exchange rate appears to be losing momentum.

AUD/USD Daily Chart

Image of AUDUSD daily chart
  • Broader outlook for AUD/USD remains tilted to the downside as the pair continues to track the downward trend from earlier this year, with the Relative Strength Index (RSI) still highlighting a similar dynamic.
  • The failed attempt to clear the Fibonacci overlap around 0.7500 (50% retracement) to 0.7530 (38.2% expansion) may give way to range-bound prices as the bullish series snaps, with a close below the 0.7400 (38.2% expansion) handle raising the risk for a move back towards 0.7320 (50% expansion) to 0.7340 (61.8% retracement), which largely lines up with the monthly-low (0.7311).

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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