Australian Dollar Fundamental Backdrop

AUD opened the trading week in the red despite yesterday’s poor U.S. PMI data allowing for most G10 currencies to pare back losses against the USD. What drove the Australian dollar further into a downward spiral was the conclusion of the 20th National Congress of the Chinese Communist party with President Xi Jinping set to begin his 3rd term as the Chinese supreme leader. While this may be good for some, from an Australian point of view, an unchanged Chinese COVID-19 policy and preservation of the battle against the ‘west’ leaves the AUD vulnerable to further downside. Mixed Chinese economic data also added to Aussie woes which overshadowed Australian Treasurer Jim Chalmers’ budget address. chin

Some highlights from the budget include:

• Increased paid parental leave.
• More accessibility to medication.
• Bigger budget towards elderly care.
• The childcare subsidy rate increased to 90% for families up to A$80000.

With regards to additional aid items, there were none showing the focus on tackling inflationary pressures and preparing for a global slowdown. Prior fuel tax concessions were not extended and tax relief for lower to middle-income earners will be slowly phased out.

The commodity outlook for Australia has tapered down as shown in the chart below echoing the downward move in AUD/USD since June. Higher commodity prices have somewhat sheltered the Australian economy, an impending recession and demand destruction could eliminate this support structure hence the need to increase revenue via other avenues mentioned above.

(Click on image to enlarge)

From a USD perspective, rumors around the Federal Reserve potentially cutting back on aggressive monetary policy could give AUD some backing should economic data approve such a notion. Later this afternoon U.S. consumer sentiment (see economic calendar below) for October is scheduled and any miss on the 106.5 forecast could bolster dovish bets giving the AUD some short-term relief.

Economic Calendar

Source: DailyFX economic calendar
 

Technical Analysis

AUD/USD Daily Chart

(Click on image to enlarge)

Chart prepared by Warren Venketas, IG

Daily AUD/USD price action shows bearish momentum taking over reinforced by the Relative Strength Index (RSI) which remains below the 50 mark. A bear flag (blue) type formation has been developing over the last few weeks and may hint at subsequent AUD weakness bringing into consideration the 0.6200 psychological handle once more. A push above flag resistance and the swing high at 0.6413 will invalidate this projection and may be stoked by a fundamental catalyst.

Key resistance levels:

• 0.6500
• 0.6413
• 20-day EMA (purple)

Key support levels:

• 0.6200
   

IG Client Sentiment Data: Mixed

IGCS shows retail traders are currently LONG on AUD/USD, with73% of traders currently holding long positions. At DailyFX we typically take a contrarian view to crowd sentiment but recent changes in long and short positioning result in a short-term cautious bias.

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