As China's economy slows down could the Aussie dollar be headed MUCH lower?

Market Analysis /
Greg McKenna / 18 Jun 2018

Friday I suggested that the chances are growing that the Australian dollar breaks the low for 2018 and heads into the 0.7125/50 region. 

The probability of such a break seems to be growing as sentiment turns against the Aussie dollar and as traders and investors increasingly seem to find reasons for further downside risk. 

Sure it might only be sentiment - a very fickle friend - but it highlights that the Aussie dollar in the current circumstance is likely to be offered on any rally. 

To reiterate what I mentioned in MArkers Morning earlier today. 

Copper is down, oil collapsed, China’s data flow is starting to stink, and a trade war is kicking off properly now. These are all bad signs for the Australian dollar and ones which point to lower levels yet.

Indeed when you read the press – last week’s FT article – or comments from many pundits you can sense the worm of sentiment turning further against the AUDUSD.

Take this relationship between the Aussie dollar and the Shanghai composite index in China. One of my favourite - and most generous - sharers on Twiter, Sunchartist, tweeted the following chart simply saying, "my Favourite 2 correlation pair SHANGHAI COMP AUDUSD". 

Source: Twitter Screenshot
Source: Twitter Screenshot

The clear implication of the correlation is that both are growth proxies, both are China proxies, and both have broken down. 

Indeed while the RBA grapples with what exactly is going on here in the Australian economy right now and sounds nervous so to are investors worrying the economy is slipping.

Oh and by the way, if you are interested in Australian economy you just have to listen to this podcast from Business Insider which includes a discussion with the Kouk about why the RBA should cut and why wages are so weak. 

Anyway, back to the price action. 

74 cents is going to be the key level to watch. And if it breaks the 0.7125/50 region comes into play. I’m a USD bull so for me it’s just a matter of time before the AUDUSD heads lower.

But one note of caution, the ratio of global mining shares to the overall global stock market index is fairly stable, although it has taken a dip. That suggests that global traders haven’t exactly capitulated on the positive outlook for growth and relative value. The question is whether that can save the Aussie dollar. The answer I believe is no. The domestic economic outlook and thus the RBA and bond market moves will predominate.

On the day 0.7400/20 is key support. Any rally to 0.7500/25 is likely to be offered.  

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

Have a great day's trading.

Greg McKenna

Chief Market Strategist

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