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Australian Dollar rebounds as market sentiment improves

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  • Australian Dollar recovers part of the previous day’s loses on improving market sentiment. 
  • Traders are venturing into riskier assets which is good news for the AUD but bad news for the safe-haven USD. 
  • The Aussie tanked on Tuesday after China trade figures for July came out below expectations.
  • The data suggested Chinese demand for Australian raw materials was lessening.

The Australian Dollar (AUD) rebounds against the US Dollar (USD) on Tuesday as market sentiment improves, supporting commodity currencies such as the Aussie. 

The recovery comes after one of the Australian Dollar’s worst day’s of the year when it fell to below 0.6500 briefly after the release of weak Chinese trade data suggested a potential slowdown in the global economy – and demand for Australia’s raw materials. 

Commentary from Federal Reserve officials later in the day, however, may have taken the edge off the Aussie’s collapse, as the pair stabilized and began to recover.

AUD/USD now trades firmly back in 0.65s during the US session.  

Australian Dollar news and market movers 

  • The Australian Dollar reverses some of the previous day’s losses as markets adopts a risk-on mode, helping commodity currencies such as the Australian Dollar.
  • The pair had dived to new lows for the summer after the release of China Trade Balance data on Tuesday, showed a substantial decline in imports and exports. 
  • The data stoked fears China may be slowing down, that its property bubble could be on the brink of bursting, and that the global economy could start to decline. 
  • It indicated reduced demand for commodities, especially Australia’s main export Iron Ore, traditionally imported and used to make steel for China’s vast property and infrastructure projects.
  • Measured in US Dollars, Chinese imports fell by 12.4% which was well below the 5.0% decline expected by economists and the 6.8% drop in the previous month of June. 
  • In Yuan, imports fell 6.9% vs. -2.5% expected, and -2.6% previous. 
  • Chinese exports in USD fell 14.5% against -12.5% expected and -12.4% recorded in June. In Yuan, exports declined 9.2% versus -8.9% forecast and -8.3% previously. 
  • The Chinese trade balance in USD showed an $80.6B surplus versus the 70.6B expected and 70.62B previous. 
  • In Yuan terms, the Trade Balance showed a surplus of 575.5B versus 625.25B forecast and 491.25B previous. 
  • Australian data showed a decline into negative territory for the Westpac Consumer Confidence for August, which fell to -0.4% from 2.7% in July. 
  • National Australia Bank’s (NAB) Business Conditions in July edged down to 10 from 11 in June but still beat estimates of 8. NAB’s Business Confidence gauge rose to 2 from -1 forecast and -1 previous. 
  • US 10-year Treasury Bond yields dived to below 4.000% again as demand for US T-bonds increased on the back of a flight to safety. This supported the Greenback, with the US Dollar Index (DXY) rising 0.5% on Tuesday. 
  • China’s policy of trying to diversify away from relying too heavily on Australian raw materials is a long-term negative for the Aussie, according to Clifford Bennet, Chief Economist at ACY Securities. 
  • The Aussie economy will not be ‘saved’ as it has done in the past by Chinese super-growth according to ACY’s Bennet. 
  • AUD/USD could fall to as low as 0.40, according to David Llewellyn-Smith, Chief Strategist at the MB Fund and MB Super. 
  • He likens the current market conditions to those in the 1990s, comparing China to Japan, which similarly underwent an economic boom before peaking in the 90s when the Japanese property bubble burst, bringing the good times to an end. Llewellyn-Smith foresees the same fate for China. 
  • He further expects the US Dollar to maintain its value as the AI revolution creates a tech boom in the US, just as the dot-com bubble did in the 90s. 
  • The Australian Dollar has been on a weak footing since the RBA left the policy rate unchanged at 4.1% last week, against the market expectation for a 25 basis point hike. In the policy statement, the RBA explained that the decision to hold rates unchanged would provide them more time to assess the impact of policy tightening to date and the economic outlook. 
  • That said, they did not completely rule out the possibility of more rate hikes in the future, “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon the data and the evolving assessment of risks,” the RBA noted.

Australian Dollar technical analysis 

AUD/USD is in a sideways trend on both the long and medium-term charts. The February high at 0.7158 is a key hurdle, which if vaulted, will give the longer-term charts a more bullish tone. 

The 0.6458 low established in June is a key level for bears. If this is breached decisively, it would color the charts more bearish. Price is currently closer to this key low. 

Australian Dollar vs US Dollar: Weekly Chart

Price has now broken cleanly below the confluence of moving averages (MA) close to 0.6700, made up of most of the major SMAs – the 50-week, 50-day and 100-day. The breaching of this key support and resistance level is a bearish sign. 

Australian Dollar vs US Dollar: Daily Chart

AUD/USD has also broken below the 0.6600 June lows, and a continuation down to the key May lows at 0.6460, is quite possible. A decisive break below them would open the way for a move down to 0.6170 and the 2022 lows. 

Because the pair is in a sideways trend overall, it is unpredictable, and the probabilities do not favor either bears or bulls overall – nor is the Relative Strength Index (RSI) providing much insight on either timeframe. 

In technical terms, a ‘decisive break’ consists of a long daily candlestick, which pierces cleanly above or below the critical level in question and then closes near to the high or low of the day. It can also mean three up or down days in a row that break cleanly above or below the level, with the final day closing near its high or low and a decent distance away from the level. 

Risk sentiment FAQs

In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.

Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.

The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.

The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.

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