AUD/USD, Crude Oil: Cyclicals swoon as global economic concerns intensify

Downwards trend with red arrow
David Scutt 125
By :  ,  Market Analyst
  • Economic concerns are impacting cyclical assets such as AUD/USD and crude oil
  • AUD/USD is pressured by continued weakness in China’s property sector
  • Crude oil market appears oversupplied near-term, weighing on prices

Inflation concerns out, global growth concerns in

There’s no shortage of confusion as to why AUD/USD remains in the doldrums, continuing to struggle near multi-near lows. The Federal Reserve appears done when it comes to rate hikes, taking the heat out of the US dollar, helping to spark renewed risk appetite in financial markets. The RBA is one of the few remaining central banks still flirting with the idea of rate hikes, helping to boost Australia’s yield differential with the rest of the world. It’s the kind of environment where the Aussie would normally outperform, but it can barely muster a bounce that lasts more than a couple of days.

Crude oil is another market that has many scratching their heads, tumbling despite ongoing supply restrictions from major producers Saudi Arabia and Russia, a war in the Middle East that could escalate into a regional conflict, along with a heavy depletion of US strategic petroleum reserves. But it too looks sick. Very sick.

While they are two separate assets, their underwhelming performance is undeniably linked: the global economy.

AUD/USD remains a China proxy

Experienced traders would know the AUD/USD is often used to express a view on China without directly investing within China. The close economic ties between the two nations, courtesy of Australia’s vast mineral wealth, means it’s a natural proxy play. Many of you would have heard the saying that when China sneezes, the world catches a cold. For Australia, you can upgrade that diagnosis to pneumonia.

What happens in China is often first felt in Australia. Like when China’s massive stimulus spend coming out of the GFC helped Australia’s economy when the rest of the world was mired in deep recession. Or when China’s attempts to curtail overinvestment sparked by that boom saw Australia struggle in the mid-2010s as commodities tanked.  Well, it may be a new decade, but the story remains very much the same.

Look at the following chart looking at the performance of the Hang Seng Mainland Property Index versus the AUD/USD.

aud vs hang seng properties subindex Nov 16

Source: Refinitiv 

While it’s not the only factor that drives the currency, it looks like China’s attempts to clean up its heavily indebted property developer sector is playing an outsized role in dictating movements in AUD/USD, acting as a proxy for what was previously the main growth engine for the world’s second largest economy.

The latest data on China’s property sector didn’t make for pleasant reading: investment tumbled 9.3% in the first nine months of 2023 relative to a year earlier. Sales by floor area fell 7.8% over the same period. In October, prices for new homes slipped 0.3% nationwide, making this the largest downturn in eight years. Until these trends start turning around, it’s hard to get enthusiastic about the longer-term prospects for AUD/USD.

Even through prices for Australia’s key commodity prices are holding up extremely well, with export volumes hardly flinching despite the property sector woes, that doesn’t seem to matter right now. Sentiment towards China is poor, so the proxy currency is performing accordingly.

AUD/USD remains a sell-on-rallies play

Looking at AUD/USD on the daily chart, attempts to break resistance above .6520 are proving futile right now, merely providing opportunities for sellers to reload looking for a return to range lows. The fact AUD/USD could not break and hold this level after the US October inflation report, when risk assets were ripping higher, provided a big tell that the Aussie remains a sell-on-rallies play indefinitely.

While RSI and MACD are trending higher, that’s unlike to prevent fresh shorts being established ahead of .6520 looking for a retest of support located around .6365 and potentially YTD lows below .6286. A stop above .6520 would offer protection against upside. On a side note, if .6520 does get taken out convincingly, the potential for a quick spurt towards .6600 may be elevated given the likelihood of sizeable layers of stop-loss orders.

aud nov 17

Crude crumbles on cyclical concerns

While not isolated to China, crude oil is another market struggling under the weight of global economic concerns. Both Brent and WTI curves are in contango, signaling an expectation of price weakness in the near-term. US inventories at the key storage hub of Cushing, Oklahoma hit multi-month highs last week, rising to 25.01 million barrels. At the same time, US crude production helped steady at a record 13.2 million barrels per day. Demand from refiners in the US and China is also diminishing, adding to the soft picture.

Crude oil looks downright ugly on the four hourly chart, taking out level after level over the past week, falling to the lowest level since July. About the only bullish thing going for it from a technical perspective is that it’s now heavily oversold near-term. The reversal back through support at $72.80 suggests there may be grounds for a short-term bounce, although that will only provide better levels to sell in the absence of a meaningful turnaround in the fundamental backdrop.

Support is located at $70.40 with a major level located further below at $67.00. On the topside, resistance is located around $75.15, $77.20 and from $80 onwards.

crude Nov 17

-- Written by David Scutt

Follow David on Twitter @scutty


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