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  • AUD/USD is back on the defensive and bears look for downside extension.
  • US elections, covid, RBA and US stimulus are all in the mix.

AUD/USD is currently trading at 0.7055 between a range of 0.7038 and 0.7157. 

The safe-haven greenback has been the major culprit for the slide in the commodity complex as the euro plummets to one-week lows on prospects of a national lockdown in both Germany and France.

Implied volatility gauges in both the common currency and the yen have hit multi-month highs while traders position the US election which is now less than a week away.   

Commodity complex under pressure

While neither of these events are directly connected to domestic affairs, per se, the Aussie trades as a proxy to risk associated features of financial and commodity markets, more so to the latter though. 

AUD’s weakness can therefore be directly related to weakness in commodities. 

Copper is down over 0.5% and West Texas Intermediate is off a whopping 4.25% at the moment, dragging the CRB index down by over 2.6%. 

Meanwhile, on the domestic front, yesterday’s headline and trimmed mean measures of inflation for the third quarter were roughly in line with expectations. 

However, the Reserve Bank of Australia will be unimpressed with the yearly result in the trimmed mean, which will likely be playing a role in AUD’s softness, if not only to help justify some of the recent weakness. 

Headline rebounded 1.6% QoQ vs the market’s expectations of 1.5%.

Meanwhile trimmed mean for the same quarter was +0.4% and slightly below the +0.5% expected. 

However, the annual print at 1.2% which was unchanged from the prior quarter is still, therefore, well below the RBA’s 2-3% target band. 

While the data holds little sway over next week’s RBA meeting where the central bank is expected to ease policy further, it all goes into the mix.

  • RBA to expand QE by AUD100 billion next Tuesday – Reuters poll

Much like other central banks, the Reserve Bank has struggled with persistently below-target inflation for the past 4.5 years, so the data comes at no surprise. 

Instead, there is a keener focus on the jobs environment at the RBA, but an underlying disinflationary pulse goes hand in hand with rising labour market slack, tentative recovery prospects in demand, and persistently low productivity.

  • RBA’s Harper: Can ramp up bond purchases indefinitely

US election, COVID-19 and US stimulus in focus

Looking forward in the run-up to the US elections, the market will remain focused on Phase-4 stimulus negotiations and the rate of the spread of COVID.

The spread of COVID-19 has accelerated sharply both in Europe and the US and it is starting to feel much like March all over again. 

We are seeing a sharp rise in the greenback and yen, stocks are off and so too are gold prices. 

Bitcoin is up to an inflexion point on the charts and commodities are under pressure due to the further slowing in global growth momentum which weighs on risky assets, pulling rates lower leaving the Aussie vulnerable. 

On the other hand, recalling what happened after the initial drop in the Aussie back in March, it was the top performer thereafter. 

It should be noted that Australia has a comparatively clean bill of health when it comes to the spread of the virus.

This could once again stand the currency in good stead going forward, especially on a Biden victory and eventual larger fiscal stimulus that is expected to weaken the US dollar. 

However, if there is to be another liquidity crisis as well as an insolvency crisis that follows, it will be a very different ballpark than the financial markets and Aussie will be playing in this time around.

AUD/USD levels

0.7005 is the line in the sand for the currency according to the daily chart and the following prior analysis:

AUD/USD Price Analysis: Bounded by support and resistance, watch for a breakout

The chart above was the analysis given at the start of the week forecasting the current price action of today:

If the support gives, then there is a strong case that can be made for a downside continuation to complete a move to 0.6950 ahead of a 38.2% Fibonacci retracement of the monthly bullish impulse around 0.6680.