AUD/USD, USD/CNH: Weakening yuan puts Aussie on track for reversal zone retest

AUD/USD closely tracking USD/CNH as the yuan weakens, suggesting a potential retest of key reversal zone
Strong correlation between USD/CNH and US interest rate expectations continues to drive price action

Overview

The Chinese yuan and Australian dollar have been moving almost in lockstep, showing a tight correlation against the US dollar. Since the Aussie is often viewed as a proxy for China, it's essentially following the yuan’s lead, making yuan movements critical when analysing AUD/USD setups.

AUD, CNH: the same picture

This chart shows AUD/USD alongside USD/CNH (inverted scale) and their rolling six-hour correlation on a five-minute basis. Not only do they look nearly identical, but with a correlation of -0.95, they’re practically moving in sync.

Source: TradingView

USD/CNH heavily influenced by Fed rates outlook

Zooming out, it’s clear USD/CNH is driven by expectations around US interest rates, particularly the short end of the curve most influenced by monetary policy. The daily rolling correlations with Fed rate cut pricing through the end of 2025 and US two-year Treasury yields sit at 0.88 and 0.98 over the last two weeks, well above what’s seen for longer-term US yields. While Trump’s trade policies with China are often pointed to as the cause of yuan weakness, this suggests it’s more about US economic strength and the likelihood of looser US fiscal policy ahead.

Source: TradingView

USD/CNH breaks out, momentum favours upside

Source: TradingView

As USD/CNH is influencing AUD/USD movements, that’s what we’ll look at first from a technical perspective.

After three consecutive failures above 7.2040 last week, the price broke cleanly above both it at the 200-day moving average on Monday, going on with the move in Asian trade on Tuesday.

With MACD and RSI (14) providing bullish signals on momentum, and the latter not yet overbought on the daily, the bias is to buy dips and topside breaks near-term, putting 7.2580, 7.2973 and 7.3114 on the radar for bulls.

On the downside, 7.2040 and 200-day moving average may now as support, making that the initial level of note.

Unless you’re a scalper, the inclination is to wait for the price to track towards one of these levels before considering trades, allowing for stops to be placed beneath them for protection.

AUD/USD nears known reversal zone

Source: TradingView

Should upside in USD/CNH materialise and strong correlation with the Aussie dollar be maintained, it means AUD/USD could be on track for another tango with long-running uptrend support dating back to the pandemic lows of March 2020.

The last three times the price has neared or interacted with this level it has delivered large bullish reversals, suggesting it's a key near-term level. It may also explain why the price has bounced from .6550 on the past five occasions it's been there.

If we see the price test the uptrend again, let the price action tell you what to do. If it breaks and closes beneath it, you could sell with a stop above for protection targeting .6348, the low set in early August. Alternatively, if the price can’t break the uptrend, you could flip the trade around, buying above with a stop below for protection.

MACD has crossed over from above while RSI (14) has confirmed the bearish signal, favouring selling pops and downside breaks near-term.

-- Written by David Scutt

Follow David on Twitter @scutty

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the market you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.