AUDUSD arm wrestle

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By :  ,  Financial Analyst

In recent articles we have discussed the China complex and how sentiment towards it had improved since the beginning of the year. The change in fortune is largely the result of the continued progress being made on U.S.-China trade talks with President Trump telling reporters on Tuesday that the talks are “going very well” but at the same time reminding all the talks are “very complex”. To many observers this indicates that the chance of President Trump agreeing on a trade deal with China before the March 1 deadline is increasing day by day and at the very least, the baseline now is for an extension to the March 1 deadline.

Which brings me to the subject of the AUDUSD whose fortunes are determined by domestic events as well as the outlook for China and the outcome of trade talks. Over the past two weeks, the improved sentiment towards China has had the upper hand, as the AUDUSD rallied from support near .7050 to be trading at .7150 at the time of writing.

Never far from an AUDUSD traders’ thinking currently is the patchy outlook for the Australian economy as the correction in the housing market continues and its impact on households. Few would be willing to disagree that after such a strong lift in housing prices, stretched valuations and high household debt levels, a correction has been sometime in the making. Continued orderly housing price falls remains the baseline for most analysts.

However, creating headlines this week is a more alarming report that suggests the property market is on the verge of its worst crash since the 1890’s and as a result the Australian economy is heading for its first recession since the early 1990’s.

While it’s impossible to rule out the possibility outlined above entirely, there is a crucial element missing for this story to play out. Quite simply the Australian labour force number, as witnessed by the release of data this morning, remains on a very strong footing in 2019. For those who missed the release, the data revealed 39k jobs were added in January, the unemployment remained at 5.0%, while the participation rate increased to 65.7% from 65.6% from the prior month.

The equation is quite simply. While the Australian labour force remains strong, households can continue to service their mortgages. Hence the type of declines spoken about in the report above seem unlikely. Furthermore, should the job market begin to deteriorate the RBA after recently moving to a more neutral bias has permitted itself the flexibility to cut rates if needed.

What this means for the AUDUSD I think is best summed up in the price action today.  While the improved sentiment towards China is likely to see dips in the AUDUSD supported there remains three good resistance levels not far above the current price. The first is the down trend resistance now at ~.7215 area which comes from the .8135 high from almost 1 year ago. Then follows the 200-day moving average now at .7270, and the last resistance level is the January .7295 high. Really, until the AUDUSD can clear all three-resistance levels on a closing basis, the arm wrestle in the AUDUSD is likely to continue.

AUDUSD arm wrestle

Source Tradingview. The figures stated are as of the 21st of February 2019. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation


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Related tags: Forex China

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