As China and EM go offered the Australian dollar remains under pressure

Market Analysis /
Greg McKenna / 03 Jul 2018
  • The AUDUSD traded to its lowest level since January 2017 with an overnight low around 0.7315. 
  • It bounced with the Euro this morning. But while emerging markets and China remain offered the Aussie dollar is likely to do likewise.
  • 73 cents must hold to avoid a deeper rout toward 0.7125/50 

I know, I know.

Emerging markets have been offered for week's and China has been offered for at least a week. So to suddenly focus on it as a cause of AUDUSD weakness is a little, shall we say, "late to the party". 

I have to cop that as a fair criticism. 

But, while I was out of the office yesterday for Mrs McK's 50th and I snuck a look at markets to see Chinese stocks off again and the Yuan still under pressure it occurred to me that I hadn't been talking much about what it all means other than through the relationship of the Aussie and copper which I was using as a proxy for the tumult in EM and Chinese markets  

 

What convinced me though to focus on the Australian dollar, China, EM linkage was a chart I saw  ZeroHedge tweet this morning of the USDCNY rate against the PBOC's RRR liquidity moves over many years. 

Source: Twitter Screenshot
Source: Twitter Screenshot

There's a pretty clear relationship there. And as the PBOC seems set to both fight the slowdown in the Chinese economy and defend itself against the Trump tariffs - which come into effect this Friday, July 6 - and gird China against an escalation in the trade war, it seems likely the RRR can be cut further to release money into the economy. 

That's important for the USDCNY level and that's also important for the Aussie dollar. 

The linkage is two fold. First is the notion that as Australia's biggest export partner China slowing impacts Australia and our growth profile. The second is that the fall in the Yuan is also having a proxy impact on the Aussie through both teh growth channel and the USD impact as well. 

You can see that in this chart of the AUDUSD versus the USDCNY (inverted) over recent week's. It's not perfect, obviously. But it does highlight the directional weight being placed on the Aussie dollar by the Chinese and emerging market ructions. 

Click on me, I'll expand
Click on me, I'll expand

So it's still a sell on rallies market. 

To the day ahead then and the RBA looms large as the big mover for the AUDUSD. Of course, neither governor Lowe or his board are likely to want to move the market too much. But there is a chance that we see a further subtle shift away from the rate hike signal as the next move to a more balanced outlook with this statement after the no move announcement at 2.30 pm my time today. 

Next month is probably an easier time to shift the goalposts given the RBA also release the August version of the quarterly Statement on Monetary Policy which provides a better platform for a change in outlook. It also gives another set of retail sales data, due tomorrow, another set of NAB business survey and Westpac consumer sentiment and more data on the housing market. And of course, it's another month further along from the budget forecasts of 3.5% wages growth which is looking increasingly heroic. 

But a time for change rhetoric might be approaching based on my read of the Australian economy - or at least the consumer part of the GDP equation.  

To the charts now and the daily and weekly downtrends remain intact. 

The AUDUSD is holding around the May 2017 low of 0.7325/30 but I see no real reason for that level to be the bottom of this run given the above and the price trend. So its the December 2016 bottom around 0.7150, not to mention my Fibo projection target near there, which looks like the point of attraction. 

On the day 0.7345, 60/65 then 0.7393 which offer resistance. O.7313/15 then 73 cents are the key supports. 

Click on me, I'll expand
Click on me, I'll expand

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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