AUD/USD teetering as selling momentum delivers death cross

AUD/USD slumped to multi-week lows last week in an environment you’d normally expect it would rally
Watch Chinese markets today as they were very influential on AUD/USD last Friday
AUD/USD looks horrible on the charts, topped off by a death cross being generated to start the trading week

The summary

AUD/USD is threatening to break the uptrend it’s been in since October, failing to find traction on the charts despite what was the largest coordinated central bank dovish pivot since early 2020 last week. With little event risk on the calendar, the fortunes of AUD/USD may be determined by USD/CNY following a dramatic end to trade in mainland Chinese markets on Friday.

The background

For a currency long regarded as a proxy for risk appetite, the Australian dollar didn’t behave as you’d expect last week, sinking to multi-week lows on Friday.

It was the largest coordinated central bank dovish policy shift since the start of the pandemic, coming out of nowhere. It would be naive to think it was merely a coincidence. It almost certainty was by design, providing a green light for traders take add to risk.

However, the interesting thing was risk didn’t rally by any significant degree. The US dollar ended up rebounding despite the Fed’s dovish surprise.

Instead, the focus of AUD/USD traders was on an abrupt decline across multiple asset classes in China on Friday, pushing the hourly correlation with USD/CNH to an extreme -0.98 on the one-minute tick chart during the session. There was no catalyst to explain the sudden offer across Chinese markets.

With AUD and CNH moving in lockstep against the USD in Asia, it’s likely we may see a similar outcome to start the trading week, potentially determining whether AUD/USD will manage to hold its uptrend.

The trade setup

AUD/USD looks vulnerable to further downside.

The price action late last week was undeniably bearish, with a rejection on Thursday from downtrend resistance resulting in an inverse hammer candle printing. That was followed up on Friday by an ugly bearish candle, seeing the price break through its 50 and 200-day moving averages, delivering a death cross in the process.

AUD/USD is now teetering on its uptrend, with price and momentum indicators suggesting the risk of a break is growing.

Should we see a break, initial downside may be hard won with the price finding of support on dips towards .6490 over the turn of last month. Below, the double bottom around .6450 would be the next downside target with little visible support evident below until below .6300.

Those considering selling a break should ensure they place a stop above the trendline for protection against a reversal. If the price works in your favour, you could lower the stop to the initial entry level, providing a free hit on possible downside flush.

The wildcards

The performance of Chinese markets on Monday may be influential on the AUD/USD. We may get an early sighter of what to expect when the People’s Bank of China announces its daily USD/CNY fixing at 12.15pm AEDT. A weak fix last Friday seemed to set off the declines asset classes, so keep an eye on it today.

Later in the week, Australia’s monthly inflation indicator and US core PCE inflation reports dominate the AUD/USD calendar, although neither screen as particularly important for the longer-term trajectory. The Federal Reserve conditioned markets to look through inflation reads until we get further into the year while the Australian inflation indicator does not contain much new information on services prices, the area of most interest for the RBA.

-- Written by David Scutt

Follow David on Twitter @scutty

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