When we last visited AUDUSD in early September we emphasised that while the Aussie had been under pressure from loose monetary policy by the Reserve Bank of Australia (RBA) as well as the Syrian escalation-related fears, there was good room for the Pacific currency to appreciate on a broad basis with a potential resumption of risk appetite. (For details for this , please see "FX Update: Aussie with ample room to catch up the risk wagon").
Subsequently, a combination of positive external conditions (rising global risk appetite and the pushing forward of asset purchase tapering by the Federal Reserve) and improving domestic factors in the form of rising housing prices and confidence readings, have worked to lift the Aussie considerably higher. With the Australian inflation outlook also having risen considerably, the dovish RBA, which had already cut the Australian benchmark policy rates to a record low of 2.5 percent, has been pushed into a more neutral stance, further supporting the Australian dollar.
Spiking Chinese yields put a damper on Aussie gains
While the gains since our last update have indeed been impressive in AUDUSD, the advances have halted in the past week and have again started lagging the risk appetite driven gains in higher-yield/high beta currencies. The chief reason for the stalling Aussie gains appears to be the jitters emanating from a sudden spike in Chinese short-term money market rates, overshadowing a string of robust data from China of late.
With China by far the largest buyer of Australian resource-heavy exports and the country's largest trading partner, the Australian dollar remains more exposed to swings in Chinese data. While it remains to be seen whether the spiking rates in China will be short-lived or indicative of more sustained monetary tightening by the Chinese central bank in the face of rising inflation and high credit growth, the Australian dollar's sensitivity to these shifts is quite likely to remain in place.
From a technical point of view, however, AUDUSD is now at an interesting juncture, with further upside gains now needing key technical confirmation. With the above in the backdrop, we revisit the AUDUSD technical picture, with a focus on both the upside and downside key levels and dynamics:
Key resistance has capped AUDUSD for now
AUDUSD showed increasing signs of exhaustion last week, with the pair unable to close above the two key upside hurdle levels:
- 200-day moving average that came in at 0.9747 at the time of the breach.
- 0.9717, which is a 50 percent retracement level in the 1.0583—0.8848 wave.
This has left AUDUSD with a rather neutral stand on the technical outlook. For the upside of the cross, on the short-term time horizon, we look for a daily closing above the 0.9675 level, which would give scope for a test of the above mentioned resistance levels, as these remain the key hurdle levels preventing AUDUSD from rebuilding its bullish bias.
On the downside, in turn, key near-support now comes in at 0.9570, which represents a short-term double bottom. Further out, a daily closing below the 0.9500 level would be needed to pave the way for a test of 0.9400 support.
AUDUSD remains capped ahead of key resistanc