AUD/USD to defy bearish breakout traders once more? Asian Open

Market Summary:

• Credit rating downgrades made another mark on Wall Street following Moodey’s decision to downgrade rating for ten small to medium sized US banks
• Wework (WE) shares fell -19% in extended trading after raising “substantial” doubt over its ability to continue operating
• It was a game of two halves on Tuesday for WTI crude oil, which reached our first target around the 81.50 low and continued down to 80 following weak China trade data, before recouping all of the day’s losses when the EIA (Energy Information Agency) upgraded their GDP forecast for 2023 to 1.9% from 1.5%.
• Fed member Thomas Barkin suggests he’s not yet decided on his decision for the Fed’s September interest rate decision, saying that the Fed have time before the next meeting to “figure out whether the various forecasts of where the economy is going come true”
• Yet Patrick Harker seems to agree with market pricing and things the Fed may be at a point where it can hold interest rates steady. Fed fund future currently imply an 86% chance of the Fed standing pat.
• China’s trade figures point to a weak start for Q3 GDP, with imports falling to -12.4% y/y (weak domestic demand) and exports falling to a post-pandemic low of -14.5% y/y (weak overseas demand). Whilst the latest round of stimulus is yet to kick in or be felt it’s not a great start to the second half of a so-far disappointing year, compared to expectations.
• Whilst plenty of risk-off headlines were attributed to the weaker China data, the fact is that we saw Asian indices, gold and oil falling whilst the US dollar was broadly higher right from the Tokyo open. The yen was also broadly weaker from the Tokyo open following soft wages and housing spending data.
• A measure of business confidence in Australia by NAB (National Australia Bank) noted that business labour costs rose 3.7% q/q in July, which is a source of inflation my colleague David Scutt suspects could be “fuel for a cash rate above 4.1%”

Events in focus (AEDT):

• 08:45 – New Zealand’s retail sales
• 09:50 – Japan’s retail sales
• 11:30 – China CPI, PPI
• 13:00 – New Zaland’s inflation expectations
• 16:00 – Japan’s machine tool orders

Technically Speaking:

• USD/JPY rose for a second day but stalled around last week’s close high, which brings the potential for a pullback lower early in today’ Asian session, although it also maintains the potential to make a run for 144 as long as prices hold above 143
• AUD/JPY formed a bullish pinbar with its lower wick respecting the February high as support. A break above 94 assumes bullish continuation.
• We saw the anticipated range expansion on USD/CNH to the upside, which closed at a 20-day high. Bulls could seek dips around the 2019/2020 highs around 7.2.
• WTI crude oil formed a bullish hammer with a lower wick finding support at 80 and the lower trendline. Is the pullback now complete?
• AUD/USD continued lower without the pullback towards Monday’s low that I was hoping for, and traded briefly beneath 65c before recouping around half of the day’s losses.

ASX 200 at a glance:

• The ASX 200 formed a bearish pinbar on the daily chart following a false break out of its 2-day consolidation
• Whilst it got close to our initial 7350 target in line with yesterday’s bias, its small rally and quick reversal serves as a reminder to remain nimble at this time of year

AUD/USD Chart:

At the beginning of the week I was pondering whether we were going to see AUD/USD head of last week’s low (with the potential for a break towards the YTD low), or break above 66c as part of a larger reversal. It seems to be trying both scenarios. Yesterday’s bearish candle saw prices break momentarily below 65c before recouping around half of the day’s losses, which suggests demand resides above the YTD low. The Aussie also has a tendency to not ‘play ball’ with classic breakouts, so a hunch at the back of my mind is that ‘the battler’ can defy its own trend once more.

Of course, for it to see a sustained break above 66c, we’ll likely need to see softer US inflation data (and improved inflation from China in a couple of hours could also help).  Whilst the near-term price action may turn out to be tricky heading into these important events, I suspect AUD/USD will remain above the YTD low and potentially break above 66c to defy bears ‘caught short’. And means bulls either need to try and identify a low ahead of a breakout or wait for prices to break above 66c to assume a bullish continuation.

But with a bullish RSI divergence lower worth and false break of 65c, I suspect at least a return to the July over the near-term as the Aussie tries to shake bears out for the sheer fun of it.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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