Australian Dollar Charts Argue for More Losses but Not All Buyers are On Strike

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- AUD on rocks after Trump hits China with fresh trade tariffs.

- Charts argue for AUD losses says Scotiabank technical analyst.

- AUD is a sell on rallies says Commerzbank technical analyst. 

- But UBS tips buy, says house price fall over and bad news in price.

- Tells clients to sell EUR/AUD, as EUR woes seen getting worse.

The Australian Dollar was on the rocks Friday after President Donald Trump imposed fresh trade tariffs on China, risking a further upset for the global economy, and technical analysts are warning that there could be more pain ahead for the Antipodean unit .

President Trump wrote in a Twitter post late Thursday that China's remaining $300 bn of exports to the U.S. will be subjected to a 10% tariff from September 01 after White House negotiators returned home "constructive talks" aimed at addressing the other side's "unfair" trading practices. That's in addition to a 25% tariff already covering another $250 bn of China's annual goods trade. 

The announcement prompted a broad sell off in a then-strong U.S. Dollar but it's also hit the risk-sensitive Australian Dollar because of its sensitivity to commodity prices and global risk appetite as well as Australia's significant trade relationship with China. Global growth slowed rapidly in the last year due to the trade war, which has hurt business confidence the world over but particularly in manufacturing and trade-intensive economies like the Euro area.

Thursday tariffs and the resulting sell off were so significant that a strong retail sales report for the month of June passed under the radar of Australian Dollar traders in the early hours of Friday morning, even though signs of life on the Australian high street are a positive for the Aussie. 

"The next few monthly retail trade releases will be important to see whether tax rebates and lower mortgage rates are supporting consumer spending," says Kim Mundy at Commonwealth Bank of Australia. 

Above: Australian Dollar performance Vs G10 rivals Friday. Source: Pound Sterling Live. 

"Risk assets are under broad pressure today hit by the double whammy of: (a) the White House broadening tariffs to the entirety of US imports from China and (b) the hangover from Wednesday where the Fed were not seen to be easing decisively enough. So today we’re left in a position where secular stagnation fears just got bigger," says Chris Turner, head of FX strategy at ING. 

Trump's apparent decision to use tariffs as a means of increasing pressure on China during trade negotiations with the world's second largest economy came at a time when the Aussie was already under pressure because the Federal Reserve (Fed) was viewed on Wednesday as reluctant to provide the kind of stimulus to the U.S. and global economies that markets had come to anticipate. 

Fresh tariffs on China could mean the Fed is now more willing to cut U.S. interest rates to a greater extent but price action Friday morning suggests the new tariffs would be an offsetting factor for the Australian Dollar, leaving it at risk of further weakness. And the charts were already arguing for more downside, according to analysts at Scotiabank and Commerzbank. 

"The potential for a significant rebound looks limited at this point. Indeed, the AUD’s loss of support below the base of the Jun/Jul consolidation (bearish wedge) suggests ample scope of losses to extend. We spot support at the Jun low (0.6830/35) and the Jan flash crash low (0.6770) but trends suggests risks might extend lower towards the 0.66 area," says Eric Theoret, a technical analyst at Scotiabank, of the AUD/USD rate. 

AUD/USD rate shown at 4-hour intervals.

The AUD/USD rate has fallen 1.6% in the last week alone and is now down 3.6% for 2019. Karen Jones, head of technical analysis at Commerzbank, says a "TD perfected set up" on the daily chart suggests the exchange rate might bounce in the short term but that this should be used as a selling opportunity. 

"AUD/USD remains under pressure following the break below the mid June low at .6832. Below .6832 targets the .6738 January 2019 low and .6725, the 2016-2019 support line (connects the lows). We will wait and sell the rallies as we note the TD perfected set up on the daily and this implies a near term bounce. Rallies will find initial resistance at .6949," Jones writes, in a briefing to clients. 

The Australian Dollar may have been out of favour with technical analysts studying trends and momentum on the charts as well as under broad pressure on the market in the final session of the week, but some fundamental analysts are still backing the antipodean unit. 

"With front -end forwards now close or below the RBA cash rate; and OIS markets discounting almost two full cuts by mid-2020; we think that the bearish case for the Australia economy is fully discounted by markets. This leaves front-end rates and the AUD vulnerable to near-term positive shocks," says Giulia Specchia at UBS. 

Charts may have argued for losses for some time and might still be on Friday but developments in the domestic economy and at the Reserve Bank of Australia (RBA) have also played a significant role in the Aussie's decline, although these latter heawinds are now on the verge of turning into tailwinds. 

Above: AUD/USD rate shown at daily intervals. 

"The surprise election result, along with coordinated easing from APRA and RBA rate cuts, have seen sentiment towards housing turn positive. Indeed, auction clearance rates are now at their highest level in over two years, and signal a stabilisation in housing prices may be on the cards," Specchia says. 

Australian economic growth slowed late last year in response to the U.S.-China trade war and weakness in consumer spending that's thought to have resulted from a steep and protracted downturn in house prices, which have both served to keep inflation beneath the 2% target and forced the RBA to cut its interest rate twice this year. 

Those cuts have eaten away at the returns investors can earn from buying Australian bonds instead of those issued by other countries, which has driven international capital out of and away from Australia and pushed the currency lower in the process. 

Markets are betting the RBA will cut its cash rate again before the year is out but UBS says the Australian Dollar has already paid the price for those anticipated actions and that there are signs the economy may be turning a corner.  

"The recent in-line print for Australia's CPI and the fact that the Fed signalled that the recent cut was more of a 'mid cycle adjustment' rather than the beginning of a cutting cycle also go in the direction of a pause in RBA's easing cycle," Specchia writes. "We suggest positioning for some repricing of the RBA & higher AUD on crosses."

 

Above: EUR/AUD rate shown at daily intervals. 

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