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  • AUD/USD has reversed earlier gains and is now trading back below 0.7300 amid a pick up in USD following strong PMI data. 
  • Prior to the US data, AUD was also hit as Senior Trump admin officials signalled a push for new hard-line measures against China.
  • AUD/USD has now broken out to the downside of a short-term bullish trend channel, so more downside is possible.

AUD/USD has reversed course from earlier highs in the 0.7330s to fresh daily lows back beneath the 0.7300 level. The pair currently trades with losses of around 10 pips, or 0.15%. 

Strong US data triggers broad USD rally

US Markit PMI data was just released and beat expectations by a wide margin; manufacturing PMI unexpectedly jumped to 56.7 from 53.4, versus expectations for a slight drop to 53.0. Meanwhile, services PMI also unexpectedly jumped to 57.7 from 56.9, versus expectations for a drop to 55.0. That put manufacturing PMI at its highest level since September 2014 and services PMI at its highest level since April 2015. “The November PMI surveys provide the first post-election snapshot of the US economy, and makes for very encouraging reading”, said Chris Williamson, Chief Business Economist at IHS Markit.

The Dollar Index (DXY) surged on the data, rallying from just above 92.00 to current levels closer to 92.40. Note that it is unusual for IHS Markit PMI’s to trigger such a large reaction, but this report might have triggered such a reaction as it contained evidence of a coming uptick in inflation; “the surge in demand and hiring has pushed prices and wages higher. Average selling prices for goods and services rose at the fastest rate yet recorded by the survey, with shortages of supplies also more widespread than at any time previously reported” commented IHS Markit’s Williamson. Hints of coming inflation could be giving the USD bulls might hope that Monday’s data foreshadows a coming rise in inflation that might lead to the Fed raising interest rates sooner than currently expected by most market participants, hence the large positive USD reaction.

AUD takes a knock on negative US/China headlines

Prior to the strong US PMI numbers with triggered a USD rally, AUD sentiment had already been hurt by the news from Senior Trump administration officials that they are pushing for new hard-line measures against China, despite the Administration entering its two months in office.

According to the Senior officials, they want to create an informal alliance of Western nations to jointly retaliate when China uses its trading power to coerce countries and was motivated by the economic pressure that China has been putting on Australia after the country called for an independent investigation into the origins of the Covid-19 pandemic.

This type of approach to tackling China is likely to be popular amongst the Biden administration, who have indicated they favour the US essentially teaming up with other Western democracies (like the EU, UK, Canada, Australia etc.), rather than the US trying to go it alone as it did for most of the Trump administration years. Hence, this new approach set to be taken by the Trump administration is likely to continue under the Biden administration.

Today’s news is unlikely to be a game-changer for US/Chinese relations, or more broadly West/China relations, but is likely to just highlight the continued economic/technological decoupling that is likely to continue under the still fairly anti-China Biden administration over the next four years, or so most analysts in the market assume.

AUD/USD fails to break above top of recent range, breaks out of short-term bullish uptrend

AUD/USD remains stuck within its recent 0.7220-0.7340ish range, which has been in play since early November. The pair tested the upper bounds of the range, but sellers came in ahead of last Tuesday’s high at 0.7340 and have now pushed the pair back to 0.7300.

Amid the recent USD rally that has driven AUD/USD lower, the pair has broken below a short-term uptrend that had been intact since last Thursday’s lows put in just above 0.7250. The pair has since made fresh daily lows beneath 0.7300 and is eyeing a test of a move towards last week’s lows of just above 0.7250. Beneath that, the next notable area of support is the bottom of the November range at 0.7220. If the bulls regain control, resistance at the top of the recent range at 0.7340 is likely to continue to be formidable.