AUD/USD plunges ahead of GDP, yields and USD surge: Asian Open – 06/09/2023

Market Summary:

Falling demand saw China’s services PMI slump to its slowest pace of growth in eight months according to the private Caixin survey. Shedding -2.3 points in March to fall to 51.8 from 54.1 previously, it’s the third decline in three months, and its second fastest fall since September 2022. New export business declined for the first time this year and new orders were below the YTD average.

With that said, businesses remained “optimistic around the 12-month outlook” according to the report (believe that if you will), hiring was up in August and cost pressures eased.

The below chart shows the Caixin services survey and the ‘official’ NBS version, both of which show a loss of momentum in China’s services sector which points to slower global growth, with sprinkles of disinflation. IN fact the general theme from yesterday’s PMIs was that they were revised lower across the globe. And that didn’t bode too well for the risk-sensitive Australian dollar, which was the weakest forex major on Tuesday.

• AUD/USD maintained its spot as the weakest forex major through the European and US sessions. It was already on the ropes following weak data PMI data form China and a narrower current account surplus and stole the thunder from the RBA’s meeting.
• The RBA held rates at 4.1% as widely anticipated, making for an underwhelming exit for Dr Philip Lowe (Michelle Bullock takes over from mid September). I suspect the RBA kept in the obligatory phrase “some further tightening of monetary policy may be required” in order to make sure inflation expectations remain well anchored. Even though most Australian economic data points and softer China data warrants a peak rate at 4.1%.
• An ECB survey of economic forecasts saw the growth for the next 12 months in Europe downgraded to -0.7% and inflation expectation for three years rise to 2.4%.
• FOMC member Christopher Waller thinks the Fed have room to hike
• US bond yields were already rising on Tuesday in Asia, and the yield curve from 6-months above extended those gains in the US session. All yields from the 2-year and above rose 8.5bp or higher (and all above their 12-nmonth average)
• The US dollar index rose to a 17-month high and the US dollar was predictably the strongest forex major.
• Despite this, oil prices still managed to rise for a fifth consecutive day with Saudia Arabia and Russia extending their oil-supply cuts, which saw the front month futures contract of WTI crude oil reach $88 before pulling back
• EUR/AUD reached my initial target of 1.69 thanks to the general weakness of the Australian dollar, and the break above last weeks high increases the odds that Monday was the end of a 3-wave retracement

Events in focus (AEDT):

• 11:30 – Australian GDP: I think it is fair to say that China’s PMIs have stolen the thunder from Australia’s GDP report today, and it would take quite an upside surprise for AUD/USD to truly off the negative sentiment it sustained yesterday.
• 16:00 – German factory orders
• 17:30 – German construction PMI
• 18:30 – UK construction PMI
• 19:00 – European retail sales
• 23:45 – US services PMI (S&P Global)
• 00:00 – ISM services PMI
• 00:00 – BOC (Bank of Canada) interest rate announcement. If odds favoured the BOC to hold rates at 5% today, then the GDP contraction in Q2 announce on Friday surely closes the deal.

AUD/USD technical analysis (daily chart):

The combination of rising US bond yields, yet more weak data from China and the reinforced belief that the RBA are done with hiking interest rates saw AU/USD touch a fresh YTD low during its worst session in nearly five weeks. And the 0.6365 – 0.6400 support zone which I assumed would do a batter job of holding is very close to snaping.

If there is any reason for bears to be wary today, it’s that AUD/USD only briefly traded beneath the August low by a few pips before reverting slightly higher – and that hardly makes it a compelling breakout. With that said, the trend is clearly bearish and momentum turned lower after AUD/USD repeatedly failed to close above the 20-day EMA last week. Form here, bears may want to fade into minor rallies with yesterday’s bearish range-expansion day or wait for a break to new lows.

Australia’s Q2 GDP is released in a couple of hours. Perhaps it can give the Aussie a little boost for bears to fade into.

USD/CNH technical analysis (daily chart):

Last week I outlined the bullish bias for USD/CNH, noting its consolidation above the June highs with trend support or the 2019/2020 highs nearby for potential support. Whilst we saw a couple of intraday attempts to break beneath the June high, it held above them on a closing basis.

A day of bullish range expansion saw prices clear the retracement line and momentum has realigned with the daily bullish trend. A move to the August highs, 7.35 or even the 2022 high could be on the cards.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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