AUD/USD’s Perfect Storm On Bearish News

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As the final week of the month draws to a close, Aussie bulls are clearly licking their wounds.

The Australian dollar has been the worst-performing over the month, week and day so far as the currency faces a “perfect storm” of bearish developments:

  • Industrial metals have come under selling pressure as the latest headlines suggest that US-China trade war will only escalate from here.
  • Meanwhile, tensions between Australia and China (its biggest trade partner) continue to rise, with China denying visas to Australian journalists and Australia banning China’s Huawei from its mobile network market.
  • Westpac, one of the “Big Four” banks, raised mortgage rates, putting further pressure on Australian consumers.
  • The country is going through political turmoil, with former Prime Minister Malcolm Turnbull resigning (more like Turn-Bear on the Aussie!) and replaced by Scott Morrison.
  • Yields on 10-year Australian government bonds have fallen from 2.70% at the start of the month to 2.52% as of writing.

The combination of the above factors has made it extremely unlikely that the RBA will raise interest rates any time soon. Indeed, markets are not pricing in a rate hike from the RBA until late next year, and there’s risk that traders could push that view out toward 2020 (or even start to price in a potential interest rate cut) if the trade war continues to escalate.

Technically speaking, AUD/USD remains locked in a crystal-clear bearish channel. After peaking in the mid-0.7300s earlier this week, the currency has fallen to test its 20-month low near 0.7200 now. A break below this level would point toward a test of the prominent support levels from May and December of 2016 in the mid-0.7100s, and an even steeper drop cannot be ruled out. At this point, only a break back above the bearish trend line near 0.7400 would erase the bearish bias in the pair.

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