The 200-day SMA holds the downside so far

• AUD/USD deflated sharply to two-week lows near 0.6700 support.
• The dollar resumed its uptrend and hurt the broader risk space.
• Australia’s current account deficit widened unexpectedly in Q2.

The US dollar (USD) bounced back from Monday’s Labor Day rout, damaging the risk complex and thus triggering a fairly pronounced decline in AUD/USD on Tuesday.

That said, the spot pulled back near the 0.6700 region, or two-week lows, on renewed greenback momentum, while a gloomy outlook around China and weaker commodity prices continued to weigh on dollar sentiment Australian.

Tuesday’s (very) negative price action around the Australian dollar appears to have dampened the constructive outlook around the currency, which remains supported by today’s critical 200-day SMA at 0.6614.

The pair’s daily decline was also accompanied by further weakness in both copper and iron ore prices, particularly after Chinese data released over the weekend. The sharp decline in iron ore prices is likely to cap further gains for the AUD, while it is expected to continue amid persistently weak economic activity in the country.

Also around China, the official composite PMI came in at 50.1 in August, signaling stagnant growth. The breakdown showed a deeper contraction in manufacturing (49.1) and modest growth in non-manufacturing (50.3). In particular, the Caixin private manufacturing PMI improved to 50.4 in August from 49.8 in July.

Recent changes in monetary policy have also supported the Australian dollar’s uptrend in recent weeks. The Reserve Bank of Australia (RBA) recently opted to keep the official cash rate (OCR) steady at 4.35%, taking a cautious approach amid ongoing domestic inflationary pressures, with no clear indication of easing policy anytime soon.

In a later speech, Governor Michelle Bullock reiterated that the RBA is prepared to raise rates further if necessary to control inflation, maintaining a dovish stance due to persistently high underlying inflation. She stressed that the central bank remains vigilant about inflation risks even after deciding to keep rates unchanged.

Further optimism around the AUD was bolstered by the dovish tone of the RBA’s latest minutes, which revealed a debate among members over the cash rate target hike. The minutes highlighted lingering inflationary pressures and market expectations of possible rate cuts at the end of 2024.

Echoing the driver sentiment, RBA Deputy Governor Andrew Hauser noted that there was not yet enough confidence that Australian inflation was on a sustainable path back to target, indicating that rates should be held steady for now.

However, a drop in the Melbourne Institute’s inflation gauge to a three-year low of 2.5% year-on-year in August suggests the possibility of a lower RBA cash rate by the end of the year. Futures markets currently price it at about a 66% chance of a 25 basis point cut by December.

The RBA is expected to be the last of the G10 central banks to start cutting rates.

However, given the potential rate cuts from the Fed in the near future and the likely prolonged period of RBA tightening, AUD/USD looks poised for further gains in the coming months.

However, the Australian dollar’s gains could be limited by the slow and gradual recovery of the Chinese economy. Deflation and inadequate stimulus are stalling China’s post-pandemic recovery. The latest Politburo meeting, while expressing support, failed to announce substantial new stimulus measures, deepening concerns about demand in the world’s second-largest economy.

Meanwhile, the CFTC’s latest report for the week ended August 27 indicated that speculators remained net short on the AUD, although their positions had halved from the previous week. The AUD has been in net-short territory since Q2 2021, with only a brief fortnight earlier this year.

On the data side, in Australia, the current account deficit widened to $10.7 billion in the April-June period.

AUD/USD Daily Chart

AUD/USD Short-Term Technical Outlook

Further gains are forecast to take AUD/USD to the August high of 0.6823 (29 August), before the December 2023 high of 0.6871 (28 December) and then 0.7000.

Bears, on the other hand, could initially pull the pair towards the temporary 55-day SMA of 0.6665, before the key 200-day SMA of 0.6614 and the 2024 SMA of 0.6347 (August 5).

The four-hour chart shows an increase in bias to the downside. However, the immediate resistance level is 0.6823, which comes ahead of 0.6871. On the other hand, initial support is at 0.6711, before the 200-SMA at 0.6641 and then at 0.6560. RSI has dropped to around 32.