Australian Dollar Talking Points

AUDUSD takes out the June-low (0.6832) as President Donald Trump announces that “the US will start, on September 1st, putting a small additional tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China,” and recent price action raises the risk for a further decline in the exchange rate as it extends the series of lower highs and lows carried over from the previous week.

AUD Slumps Ahead of Retail Sales Report as US-China Trade Truce Flops

The growing threat of a US-China trade war instills a bearish outlook for AUDUSD as it puts pressure on the Reserve Bank of Australia (RBA) to further insulate the economy.

It remains to be seen if China, Australia’s largest trading partner, will retaliate against the new US tariffs as the region faces the slowest pace of growth in nearly three decades, and the weakening outlook for the Asia/Pacific region may push the RBA to endorse a dovish forward guidance at the next meeting on August 6 as “the Board is prepared to provide additional support by easing monetary policy further.”

In turn, updates to Australia’s Retail Sales report may do little to influence the monetary policy outlook even though household spending is expected to rebound 0.3% in the second quarter of 2019 as the RBA warns that “the uncertainty generated by the trade and technology disputes is affecting investment and means that the risks to the global economy are tilted to the downside.”

With that said, Governor Philip Lowe and Co. may continue to pursue a rate easing cycle over the remainder of the year, and AUDUSD stands at risk of exhibiting a more bearish behavior over the near-term especially as the Federal Reserve shows little interest in reversing the four rate hikes from 2018.

Keep in mind, the AUDUSD rebound following the currency market flash-crash has been capped by the 200-Day SMA (0.7081), with the exchange rate marking another failed attempt to break/close above the moving average in July.

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AUD/USD Rate Daily Chart

The broader outlook for AUDUSD remains tilted to the downside, with the exchange rate still at risk of giving back the rebound from the 2019-low (0.6745) as both price and the Relative Strength Index (RSI) continue to track the bearish formations from late last year.

Moreover, AUDUSD takes out the June-low (0.6832) as it extends the series of lower highs and lows from the previous week, with a break/close below the 0.6800 (61.8% expansion) handle opening up the Fibonacci overlap around 0.6720 (78.6% expansion) to 0.6730 (100% expansion).

Will keep a close eye on the RSI as it snaps the bullish formation from May, with the oscillator flirting with oversold territory; break below 30 may coincide with a further decline in the exchange rate as the bearish momentum gathers pace.

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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.