AUDUSD resilience reviewed

As I expect most traders do when they switch on the screens each morning and particularly in the current climate, I look first for relevant overnight news and how U.S. equity markets have performed, before turning my attention to FX and commodity markets.

After noting the S&P 500 had fallen near -4.50% overnight, following another big jump in COVID-19 cases in the U.S. and Europe, I was surprised to see the AUDUSD proudly perched above .6050, just a stone throw from recent highs.

In recent weeks, as viewed on the chart below, the S&P500 and the AUDUSD have been positively correlated. The S&P500 and the AUDUSD both falling dramatically lower in March before enjoying a rebound into month end.

The overnight resilience of the AUDUSD, despite the fall in U.S. equities, raises the question as to whether the decoupling is temporary or of a more lasting nature.

Two possible reasons for the decoupling spring to mind. Following better than expected China PMI data this week, the AUDUSD may be benefitting from the support of those using the AUDUSD as a proxy to position for a recovery in China.

Another possibility is that after displaying a reluctance to respond initially, which coincided with the AUDUSD’s aggressive fall, the Australian government has restored investor confidence. Both via their management and containment of the COVID-19 virus and through economic policies designed to support the economy during the COVID-19 pandemic.  

These factors also help to explain the outperformance of the local bourse, the ASX200 yesterday and again today. While we acknowledge the possibility that a subtle shift in the narrative around the AUDUSD is underway, more proof is required.  

As such, we remain with the view that the recovery in AUDUSD from the .5508 low is a countertrend rally that appears to be topping out, before the downtrend resumes.

However, in acknowledgment of the factors mentioned above, I am yet to sell the AUDUSD and have lowered my bearish reassessment level from .6330 to .6215/25.

Source Tradingview. The figures stated areas of the 2nd of April 2020. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation