Trade war will affect yuan's proxy, AUD

THE Reserve Bank of Australia (RBA) has kept its official cash rate (OCR) at the current record low of 1.5 per cent during its recent May meeting. Despite the RBA steering towards a more positive outlook, this doesn't mean that a rate cut is off the table if there are signs of weakness in the labour market, which the RBA sees as a decisive factor.

The AUDUSD currency pair jumped to a high of 0.7040 on the release of the decision to keep rates unchanged. However, it was all momentary gains as the upward move was subsequently pared back down to just below 0.6970 at the point of writing. The AUDUSD has continued to head south amidst the ongoing uncertainty due to the threat of an escalating trade war between China and the United States, more so especially with recent negotiations failing to achieve a favourable outcome for both nations. It is our view that the Australian dollar, widely regarded as a proxy for the Chinese yuan, will continue to be affected by market uncertainty during the ongoing China-US negotiations.

The AUDUSD currency pair broke through the strong support level of 0.7015 on the second day of May before turning up in the following days to retest this support, now turned resistance level. With the resistance holding, the price continued to move closer towards the next support level of 0.6950. Through the use of a Bollinger band indicator, after a previous squeeze as seen by the narrowing of the Bollinger bands in the early part of April, the price of AUDUSD has moved lower, away from the mid line of the band, and is edging along the outer lower band which is indicative of bearish strength.