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AUD/USD Rate Rebound Rattled by Fears of Prolonged US-China Trade War

AUD/USD Rate Rebound Rattled by Fears of Prolonged US-China Trade War

2019-10-07 00:30:00
David Song, Currency Strategist
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Australian Dollar Talking Points

AUD/USD struggles to retain the advance following the lackluster US Non-Farm Payrolls (NFP) report, and signs of a prolonged US-China trade war may drag on the exchange rate as it puts pressure on the Reserve Bank of Australia (RBA) to further embark on its rate easing cycle.

AUDUSD Rate Rebound Rattled by Fears of Prolonged US-China Trade War

AUD/USD has gapped lower at the start of the week as Bloomberg News reports “Vice Premier Liu He, who will lead the Chinese contingent in high-level talks that begin Thursday, told visiting dignitaries he would bring an offer to Washington that won’t include commitments on reforming Chinese industrial policy or the government subsidies that have been the target of longstanding U.S. complaints.”

The US-China trade war may become a growing concern for the RBA as US President Donald Trump insists that “if the deal is not going to be 100% for us, then we’re not going to make it,” and Governor Philip Lowe and Co. may have little choice but to further insulate the Australian economy as “a sharp decline in global economic activity would likely see asset prices fall, as well as reduce Australia's exports and domestic activity.

The weakening outlook for the Asia/Pacific region may force the RBA to lower the official cash rate (OCR) closer to zero, but central bank officials may seek assistance from Australian lawmakers as Governor Lowe pushes for “a renewed focus on structural measures to lift the nation's productivity performance.”

Image of RBA interest rates

With that said, it remains to be seen if the RBA will deliver another 25bp rate cut at the next meeting on November 5, but the Australian Dollar may face a more bearish fate over the remainder of the year as the central bank retains its pledge to “ease monetary policy further if needed.”

In turn, the dovish forward guidance may continue to drag on AUD/USD, with the broader outlook still tilted to the downside as the exchange rate continues to track the bearish trend from late last year.

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AUD/USD Rate Daily Chart

Image of audusd daily chart

Source: Trading View

  • Keep in mind, the AUD/USD rebound following the currency market flash-crash has been capped by the 200-Day SMA (0.6985), with the exchange rate marking another failed attempt to break/close above the moving average in July.
  • More recently, AUDUSD has taken out the September-low (0.6688) following the RBA meeting, with the Relative Strength Index (RSI) offering a bearish signal as the oscillator snaps the bullish formation from August.
  • However, the string of failed attempts to close below 0.6690 (50% expansion) may generate range-bound conditions, with the move above the Fibonacci overlap around 0.6720 (78.6% expansion) to 0.6740 (38.2% expansion) bringing the 0.6800 (61.8% expansion) handle on the radar.
  • Next area of interest comes in around 0.6850 (78.6% expansion) followed by the 0.6910 (38.2% expansion) region.

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--- Written by David Song, Currency Strategist

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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