0.7000 will be a key psychological level
It seems as though everything continues to be working against the Australian dollar right now. And when it comes to AUD/USD, it’s very much a tale of opposites. The most obvious one is of course central bank divergence.
With the Fed continuing to hike rates and reiterating the message they may still continue at the same pace in 2019, it’s continuing to widen the gap between monetary policy stance between the Fed and the RBA. The latter is only slated to move around Q4 2019 or possibly 2020 now as further uncertainty surrounding the domestic economy continues to clip its wings.
The second opposite that is driving the pair lower is economic divergence. With the US seeing inflation improve and Friday’s wages data started showing real signs of growth, it’s only adding to the robust growth story in the US economy. Meanwhile, in Australia there is flagging inflation, stagnant wage growth, falling house prices, and relative uncertainty surrounding household debt/consumption.
Add to the fact that there is a global trade dispute taking place that is unsettling market sentiment, which acts as a negative for the aussie and haven flows tend to help the dollar a fair bit. That makes for really core beliefs that the pair should be heading lower. The worst thing for the aussie is that all the three points listed has only gotten worse for the currency as the year progressed.
So, what’s next for AUD/USD?
After breaking the May 2016 daily support @ 0.7145 on Friday, it looks like there is still further downside to come for the pair given all the reasons above. But with any trending movement in markets, things never do move in a straight line. So, that’s something to be wary about.
Right now, there is still some support for the pair at the 0.7100 handle. However, the key level to eye for will be 0.7000.
Even on the monthly chart, you can see how much that key level is in terms of holding up the aussie. The last time the pair tested said level was back in 2016 and the low touched 0.6827 but there was no monthly close below the 0.7000 handle. Likewise goes for a previous test back in 2004 – which was also supported by the 200-month MA (blue line).
That will be a key hurdle for sellers to break below because once that really gives way, things could get ugly real fast for the pair.
But as mentioned, price movement never moves in a straight line so it’s important to weigh how the market is positioned:
Last week’s CFTC COT report showed that the market is still very much short when it comes to the aussie, but it’s still not as stretched as positions seen a couple of years back. However, we’re very near a retracement/reversal level already so this is something to consider even though fundamentals may be working against the currency.
When positions are stretched, it means that squeezes can be equally as fast and brutal as any downside move. As Adam tends to say, ‘markets tend to do whatever that causes the most people, the most pain’. And this is setting up to be something like that.
So, yes while 0.7000 may be a key level for sellers to eye it is also one that will likely see structural positions squared given its attractiveness as a psychological level and what it means from a technical perspective as well.
However, should there be any decent squeeze higher, expect rallies to be sold into still as long as the same underlying fundamentals above are still in place.