AUD/USD: Australian dollar’s recent rally could face a ceiling below 0.6900

After the global bearish episode that ran from mid-July to August 5, the Australian dollar managed to recoup all its losses against the US dollar during the same period.

AUD/USD being a higher beta play among FX The hikes rose 7.4% from an Aug. 5 low of 0.6348 to print a recent high of 0.6824 on Aug. 29, bolstered by a clear shift in the US Federal Reserve’s monetary policy stance from “more more time” to “in harmonious time”. come for the policy adjustment” Fed Chairman Powell’s Aug. 23 ex-post speech at the Jackson Hole Symposium cemented a potential 25 basis point cut in the Fed funds rate at the Sept. 18 FOMC meeting.

China’s weak macro data is back in the spotlight

The latest China NBS Manufacturing PMI data for August indicated a fourth consecutive month of contraction in production activities; it fell further to 49.1 from 49.4 in July, below the consensus of 49.5.

Its new orders subcomponent fell by a slightly larger magnitude from 49.30 in July to 48.90 in August, which is an alarming cause for concern as a significant portion of China’s economic growth so far in 2024 has been driven by external demand and the strong allocation of political decision-makers. state resources for China’s high-tech industrialization program.

If China’s manufacturing activities weaken at this rate in Q4, it is unlikely that China will meet its 5% annualized economic growth target for 2024. In addition, a weak state of manufacturing output, coupled with China’s housing market , which still doesn’t show any kind. clear signs of stabilization from a persistent trend of negative growth rates (the value of new home sales from the largest 100 real estate firms fell to 26.8% y/y in August from -19.7% in July ), there is likely to be less demand for industrial metals such as iron ore.

Iron ore prices have moved directly with AUD/USD

Fig. 1: Movement of AUD/USD and Iron Ore Futures Correlation since September 2, 2024 (Source: TradingView)

Given that iron ore is one of Australia’s main resource exports and that a significant proportion of this goes to China, if China’s economic growth slows, there is likely to be less demand for iron ore, at in turn, it will put negative pressure on Australia’s trade balance, which could trigger a negative feedback loop in AUD/USD.

Since March 2020, the movement of the Iron Ore CFR China futures contract listed on the Singapore Exchange has a positive correlation with AUD/USD. However, this positive correlation turned negative for a short period recently, from August 5 to August 29, due to the resurgence of global risk behavior (see Figure 1).

With China’s weak economic growth narrative back on the radar screen, Iron Ore CFR China (SGX) futures were down -4.2% on Monday at the time of writing, its longer-term positive correlation move with AUD/USD may return to influence the movement of the Aussie dollar.

The AUD/USD rally has almost hit the major resistance at 0.6900

Fig 2: AUD/USD major and medium-term trends since September 2, 2024 (Source: TradingView)

The recent 7.4% rally from the August 5 low seen in AUD/USD has almost hit major resistance at 0.6900 (the medium-term highs of June 16/July 13, 2023 and the line of long-term downward secular trend from February 25, 2021 maximum).

Additionally, the daily RSI momentum indicator has almost reached an overbought level of 72, which has capped AUD/USD’s previous advances since June 15, 2023.

If the key medium-term pivot resistance of 0.6900 is not breached to the upside, AUD/USD may see a bearish mean reversion scenario that will expose the next intermediate supports at 0.6700 and 0.6600 (also the moving average on 200 days) (see Fig. 2).

However, a clearance above 0.6900 invalidates the bearish scenario on AUD/USD for the next intermediate resistance to reach 0.7135.

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Editor’s note: The abstracts for this article were chosen by the editors of Seeking Alpha.