AUDUSD: downward pressure expected to continue

 Andrew Stuart Lee Evan

THE Aussie has taken a bit of a beating ever since the last article I wrote on April 25, 2022, where I had forecast a very short-term recovery of the Aussie. Since then, the Aussie had risen up to the strong resistance level of 0.7309 twice before collapsing. After breaking down the 0.6916 and 0.6740 support levels in rapid succession in less than two months, what fundamental and technical signals should we pay attention to and how should we position our trades in the coming months?

Recent strong Consumer Price Index (CPI) numbers point to how inflation in the US has been sorely underestimated. Core US inflation jumped to a 40-year high of 6.6 per cent year-on-year in September. The US Fed swaps were pricing in a 75bp hike in November.

Fundamentally, over the next year or so, it seems unlikely the Fed will ease off its strong interest rate hikes anytime soon. With the Aussie taking a strong selling due to a fall in demand for commodities such as iron and copper, and the RBA cutting 25bp instead of the expected 50bp, the downward pressure on the Aussie seems all but certain. In my opinion, this monetary policy dissonance resulting from the Fed raising its rates aggressively with the RBA not likely to keep pace will spur further downside especially over the near term.

Growing consensus among analysts is that a recession is likely to hit latest by next year. Furthermore, slowdown in global growth especially within the commodities-dependent Chinese industries such as real estate will only further exacerbate the slowing demand for these commodities, despite recent assurances from the PBOC vowing stronger support for the real economy.

In terms of technical levels, unless the Aussie crosses strongly up beyond the 0.6410 initial resistance and then the next strong resistance level of 0.6740, we should expect to continue shorting through any short-term rallies. Currently, most traders are net long; the Relative Strength Index (RSI) points to over-sell while the Moving Average Convergence Divergence (MACD) shows a slight bullish signal. As I take a contrarian view, I would continue shorting the Aussie unless there is a short-term sharp incline towards the pivot level of 0.6392, at which I would trade in view of the previously mentioned levels as well.

The writer is strategist at Phillip Nova