AUD/USD hits fresh lows as bearish sentiment towards China’s economy intensifies

The AUD/USD looks terrible no matter how you slice or dice it, sliding to lows not seen since November in early Asian trade on Wednesday. Perhaps extreme pessimism is one of the few things that may work against further declines in the near-term.

External factors are not working in the Australian dollar’s favour

From a fundamental perspective, the external environment is not working in the Aussie’s favour. Pessimism towards China’s economy is souring given a flood of underwhelming activity reports, bringing into question the outlook for commodity demand, especially for bulks such as iron ore and metallurgical coal which fuelled China’s urbanisation push, benefitting Australia greatly though boosting the nation’s terms of trade.

Markets are also looking increasingly unstable after a solid run for riskier asset classes during the June quarter. Bond market volatility remains elevated, suggesting the relative calm in stocks and FX may be a temporary thing. As has been seen time and again, in an environment of heightened market turbulence, the Aussie rarely thrives.

Domestic tailwinds are also starting to dim

From a domestic perspective, positives are also diminishing even with Australia’s unemployment rate sitting at multi-decade lows. Concern surrounding a potential wage price spiral have evaporated, as have the prospects for further RBA rate hikes. The bank’s fears of a wage breakout earlier now look misplaced, especially with growing evidence that reduced disposable income is hammering household spending, helping to suppress demand. Continued labour market strength is one of the few factor that will keep the prospect of further rate hikes alive. Thursday’s Australian labour force survey for July therefore looms large.

AUD/USD looks vulnerable on the charts

Technically speaking, the AUD/USD looks vulnerable. The uptrend the pair enjoyed last year on optimism surrounding China’s economic reopening is now long gone. So too has the period of consolidation where traders waited patiently for the hype to be replicated in the hard data – that never happened. Now the Aussie is breaking down, following a similar path the Chinese yuan against the greenback recently. Unless we see meaningful stimulus measures from China soon, helping to address mounting concerns about the trajectory for the economy, it’s difficult to get excited about a turnaround for the Aussie.

AUD/USD sellers may emerge on pops towards .6460 and again at .6500. There’s not much support below until you get to the nadir struck in October.

-- Written by David Scutt

Follow David on Twitter @scutty