AUD/USD holds 64c as US dollar rally pauses: Asian Open – 18th August 2023

Market Summary:

The risk-off tone of the week continued through to European and US sessions yesterday, with Wall Street indices falling for a third consecutive day. The S&P 500 fell to a 27-day low and the Nasdaq 100 to a 36-day low. Hawkish FOMC minutes, weak data for China and a reactive PBOC further loosening policy has been a key driver of negative sentiment. Of, and of course reports of a liquidity crunch for China’s corporations also did their part with latest news of Evergrande not helping. China’s Evergrande Group filed bankruptcy protection in New York on Thursday, in a move to protect the company’s US assets

However, perhaps there is a bit of light at the end of the tunnel in hopes of stimulus. China’s Premier Li hinted that more stimulus could be coming yesterday by saying that the country will work together to reach their economic growth target in 2023 (which is ‘around’ 5%). That would suggest some hefty levels of stimulus may be around the corner, and if deemed large enough it could finally boost sentiment and help the China A50 rally from the 12,600 area

• Hopes of stimulus was enough to help oil prices rally, with WTI crude rising over 1.5% and closing above $80
• Banks and money managers projected that July would be the last Fed hike of the cycle ahead of that meeting, according to a Fed survey released on Thursday
• This backs up Fed Fund futures pricing which estimates an 87.5% probability that the Fed will hold rates in September, despite the minutes of the latest FOMC meeting revealing some members still think more hikes may be warranted
• USD/JPY snapped its 8-day winning streak at the November 10^th High – which was the high of the day when a soft US CPI report sent USD/JPY tumbling over -4% (and was the lower bound of our resistance zone highlighted in yesterday’s report).
• Walmart (WMT) shares rallied 12.3% after beating Q2 sales and profit estimates and increasing its full year outlook, which is another sign that the US could be headed for a soft landing after all
• I suspect the RBA are now done with hiking rates given the cracks that are appearing in Australian employment data and household spending alongside continued weakness in China’s economic data
• Australian unemployment rose to 3.7% (3.5% previously, 3.3% expected), employment changed -14.6k (15k expected, prior downwardly revised to 31.3k) and participation rate was 66.7% versus 66.8% prior and expected

Events in focus (AEDT):

• 09:30 – Japan’s inflation
• 16:00 – UK retail sales
• 18:00 – ECB Lane speaks
• 19:00 – Eurozone CPI

US dollar index technical analysis (daily chart):

The US dollar index has posted an admirable rally from 100, rising just over 4% in 24 days over a relatively straight line. Rising yields, bouts of risk off and strong economic data have certainly helped along the way. But now prices have paused at the July high and the US 2-year treasury yield is struggling to break above 5%, I’m left wondering whether the dollar’s rally is set to at least pause for breath, if not retrace against its preceding rally. There’s not a huge of US data incoming, and the Fed survey released yesterday shows that banks and money managers expected the Fed’s July hike to be their last. And with USD/JPY pulling back from its highs and AUD/USD recovering back above 64c, perhaps a near-term reversal for the US dollar is not so crazy after all. Especially if we’re treated to a bout of risk-on, which could come if rumours of stimulus are to be believed.

And of course, if the US dollar really does turn lower, it should be beneficial for all of its latest victims such as EUR/USD, GBP/USD, USD/JPY and so forth.

AUD/USD technical analysis (daily chart):

If the US dollar manages to pull back, it could bode well even for the flailing AUD/USD, which touched a fresh YTD low yesterday. It flirted with a break below 64c and the November 10^th low (soft US CPI day) but managed to recover back above this level. Given AUD/USD has fallen for nine consecutive days, we could be at or near an inflection point. But for any bounce to have any legs would require, say, headlines of more stimulus from China. And if that coincides with a retracement in US yields and the US dollar, then a move to at least Yesterday’s high / June low seems plausible. Otherwise a break or daily close beneath 0.6385 suggests a move to 63c could be on the cards.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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