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AUD/USD Price Outlook: Australian Dollar Risk Reversals Slump

AUD/USD Price Outlook: Australian Dollar Risk Reversals Slump

2020-05-28 19:15:00
Rich Dvorak, Analyst
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AUSTRALIAN DOLLAR OUTLOOK: AUD/USD PRICE ACTION FACES HEADWINDS AS RISK REVERSALS STALL AMID CHINA TENSION

  • AUD/USD advance continues with spot prices trading 4% above its monthly low
  • Australian Dollar risk reversals start to turn lower amid escalating China tension
  • AUD/USD might struggle to extend higher as Aussie outlook deteriorates

Australian Dollar bulls have kept the Aussie bid since the sentiment-linked currency bottomed out roughly two months ago. Spot AUD/USD price action has surged nearly 20% off its March 28 swing low as trader appetite for risk continues to recover from the recent coronavirus panic. Relentless strength in the Australian Dollar over the last several trading sessions, which looks largely fueled by coronavirus vaccine hope, has essentially erased the 1,000-pip plunge against its US Dollar peer notched earlier this year.

AUD/USD BULLISH
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of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily -8% 11% 5%
Weekly -6% 11% 6%
What does it mean for price action?
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AUD/USD PRICE CHART: DAILY TIME FRAME (DEC 2019 TO MAY 2020)

AUD USD Price Chart AUDUSD Australian Dollar Forecast Technical Analysis

A daunting confluence of technical resistance near the 0.6700 handle presents a notable obstacle for spot AUD/USD price action, however. This potential area of opposition is underpinned by the 200-day moving average and 76.4% Fibonacci retracement of its year-to-date trading range.

Also worth mentioning, the relative strength index is perched slightly below a reading of 70 and ‘overbought’ territory, which could suggest Australian Dollar risk is tilted to the downside. Nevertheless, as steadfast market sentiment crushes volatility, it is possible that the positively-sloped support trendline provides a degree of buoyancy to AUD/USD prices.

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AUSTRALIAN DOLLAR RISK REVERSALS SUGGEST WANING UPSIDE POTENTIAL

AUDUSD Price Chart AUD to USD Australian Dollar Risk Reversals China Tension

That said, Australian Dollar risk reversals indicate that the bullish bias recently enjoyed by AUD/USD could soon unwind and pressure spot prices back lower. Perhaps explained broadly by escalating China tension – with both Australia and the United States – AUD/USD risk reversals for the overnight and one-week tenors have started to slump.

Building trade war uncertainty with China, and chance for a return to the tit-for-tat tariff spat between the world’s largest economies, is a major fundamental theme that threatens to overpower coronavirus optimism recently steering the Australian Dollar higher. If China tension keeps gaining traction, which seems likely as US President Trump and Secretary of State Mike Pompeo ramp up hawkish rhetoric directed at Beijing, market sentiment could deteriorate materially and pressure spot AUD/USD price action lower from current levels.

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Tangible retaliation by President Trump to the Hong Kong national security law, and subsequent response from China and President Xi likely to follow, could catalyze a drift lower in AUD/USD risk reversals for the one-month and three-month tenors. If this scenario materializes, this might serve as a bellwether to a bearish shift in longer-term Australian Dollar outlook.

-- Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

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