Dark clouds shroud outlook for AUD/USD

ALTHOUGH the Australian dollar (AUD) was deemed to be one of better performing G-10 currencies over the past month, this could be in jeopardy as dark clouds shroud the AUD/USD's outlook. With the recent manufacturing and service Purchasing Managers' Index (PMI) numbers tumbling amid Covid-19, it appears to be casting a shade towards Australia's economic recovery. Even though Australia is considering lifting some restrictions soon, it appears the winding down of restrictions could be very gradual, and the current economic slowdown could intensify. Aside from the fundamentals, technical indicators are also suggesting that downside pressure is emerging for the AUD/USD pair.

Firstly, the gap between the short-term moving average (50 EMA) and the long-term moving average (200 EMA) appears to be widening. This indicates that the bearish momentum is still strong. In addition, strong resistance is seen at the 50 EMA levels, where prices attempted to break above those levels for the past week, but failed. This affirms that the selling pressure is present, and hints towards more downside risk being on the horizon for the AUD/USD pair.

Secondly, the downtrend line which formed since the start of 2020, seems to be holding strong. Prices have tested the downtrend line on various occasions, and are currently still facing strong resistance at the current levels. Thus, should there be no successful breakout from the current bearish trend, it serves as a strong indication that further weakness could entail for the AUD/USD pair. In addition, using Fibonacci retracement drawn from the Jan 21, 2020 high at 0.705 to the March 19, 2020 low at 0.551, it is noted that prices are currently at the 50 per cent support levels. Should prices dip further from current levels, its immediate support will be at 0.610, the 38.2 per cent Fibonacci level, presenting a 4.04 per cent downside potential.

Lastly, a bearish divergence pattern is forming. This is seen via the Moving Average Convergence Divergence (MACD), which is a trend-following momentum indicator, forming higher highs. Meanwhile, the prices are making lower highs. This indicates that while momentum is strong and picking up, there is discrepancy in the prices, which suggests that the AUD/USD will continue on a descending trajectory. With strength still prevalent in the current bearish trend, it suggests that prices still have a tendency to trend lower.

On a fundamental aspect, the Australian economy has essentially suffered from a double whammy. Since the start of 2020, the wildfire crisis dampened market confidence, and resulted in huge economic damage. With barely any time to recover from that, Covid-19 soon struck Australia, routing its economy further. In addition, rating agency S&P downgraded the country's credit-rating outlook from "stable" to "negative". Coupled with the escalating government debts due to quantitative easing (QE) measures, this is expected to further deteriorate Australia's economic standing, and has casted a shadow over the AUD. For now, Covid-19 has dealt Australia with a severe economic and fiscal shock, and it is forecast that the Australia's economy could contract 10 per cent, which would be its biggest and deepest possible recession in 90 years. Moreover, Australia's farm industry is still in peril as the drought conditions have affected national production. There could also be impending disruptions due to the uncertainties in the Covid-19 situation which could affect both exports and the import supply chains. Hence, with the faltering of two major economic drivers - tourism and agriculture - it appears that the AUD's strength could be hampered.

On the other hand, with markets generally remaining wary about the current state of uncertainty, it has continued to prop up the USD. Markets appear to be bracing for possible dire news with regard to the economic fallout attributed by Covid-19, resulting in the USD likely to continue shining as a safe-haven currency. It is noted that the USD has closely tracked risk sentiments throughout the Covid-19 crisis, and remains at current elevated levels due to the continued Covid-19 related uncertainties. Amid the worsening global economic outlook, a looming global recession, and the current Covid-19 pandemic, the USD's appeal as the world's reserve currency continues to be its guiding strength, as the demand for cash rises.

Thus, the technical bearishness, coupled with the bleak outlook in Australia's economic growth, is expected to further fuel downside momentum for the AUD/USD. The immediate support will be 0.610 (4.04 per cent downside potential), while the next support is at 0.587 (7.65 per cent downside potential). Meanwhile, the immediate resistance will be at the 50 EMA levels.

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice