AUD/USD bulls capitulate as USD bounces back and commodities tire

AUD/USD is currently trading at 0.7275 and travelling between a range of 0.7265/0.7339, down some 0.85% on the day. 

Despite a strong improvement in risk appetite in recent weeks, setting the stage for near-term AUD outperformance and while the RBA appears to be less nonchalant about the surge in the Aussie since March, bulls nonetheless capitulated.

Weighing on the outlook for the currency has been a series of data that has revealed the vulnerability behind the curtains of the recent weakness on the greenback.

At the same time, the Reserve Bank of Australia’s somewhat surprising expansion of funding facility and now what appears to be a semi-come back in the USD have come at the same time to squeeze out the less committed bulls. 

COVID-19 is largest shock to Australia’s economy since WWII

For data, we have seen the Australian economy shrink by 7% QoQ in Q2, the largest fall since quarterly records began in 1959.  

The data is a stark reminder that, while there is ground for risk assets to continue punishing higher, supporting the bullish narrative for the Aussie,  fiscal and monetary policy settings will need to remain supportive for some time to come. 

Coupled with the GDP, we saw  July registering a large fall in the trade balance surplus to AUD4.6bn, down AUD3.5bn on the June number.

Resource exports, excluding gold, dropped 8.1% MoM in July, as all the bulk commodities experienced large declines, particularly LNG which fell 17.5% MoM.

This lead to Australia’s trade surplus experiencing its first sharp decline in a number of months on the back of a large fall in exports and a strong rise in imports. 

While imports are a sign of consumption picking up, the fall in exports is a concern for Aussie bulls considering the surplus current account has been supportive of the Aussie throughout the crisis. 

The decline in exports was primarily driven by weakness in bulk commodity exports, however, analysts at ANZ bank explained that they do not think this decline in the surplus is the start of a trend lower. 

We think demand from China for resources, particularly iron ore, will hold up over the coming months based on production data and the price of iron ore. 

We also don’t see further material increases in imports while some parts of the country continue to experience severe movement restrictions.

Commodities waning

A stronger USD and mixed economic data saw investor appetite wane in the commodity complex. 

The CRB index is currently down some 0.67% at the time of writing. 

However, higher iron ore futures were not enough to push the bulk commodity sector higher earlier this week nor lift the Aussie back to bullish territories. 

The GDP data provides further confirmation that the COVID-19 pandemic is the largest shock to Australia’s economy since WWII and if the currency is to continue higher, it will require an ongoing bearish trajectory in the greenback from here on. 

Besides the greenback, the analysts at ANZ Bank argue that the focus is now on Q3 GDP – how much the second wave and associated shutdown in Victoria have weighed on growth – and Q4 – how the economy will manage with sharply lower fiscal stimulus. 

The analysts explained that significant further stimulus over the next few years is likely to be required to generate growth and jobs and drive the unemployment rate down.  

AUD/USD levels

As mentioned, the US dollar has been trying to make a recovery. 

The DXY currently trades at 92.75 after a battle back from the recent post-Powell speech  91.74 lows. 

However, when looking on the weekly chart there is risk of a  failure at resistance will open the risk of a downside extension:

Tomorrow’s Nonfarm Payrolls will now be the main focus for the remainder of the week for USD markets, but should the dollar fail here, then there are prospects of a bounce-back on the AUD charts: