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  • AUD/USD is traded as a proxy to what goes down in China town, and the fact that poor Chinese data encouraged speculation that a trade deal with the US must be done to avert further economic damage has actually boosted the outlook for both the Yuan and the Aussie.  
  • AUD/USD initially dropped, as to be expected, on both the Aussie CPI and Chinese PMI disappointments.  
  • AUD/USD found support just below the daily trend line support with the confluence of the 21 4hr and 1 hr SMAs and the 38.2% Fibo retracement level of the 17th Oct to 26th Oct sell-off – recovering to 0.7107.  

AUD/USD is a side of two coins and just when you thought bad news should be bad news, it turns out that it could be good news.  The data of late coming from the US, China and Australia supports a downside bias in the pair. Indeed, that is what we have on the charts for the broader balance is bearish, and the near-term price action is merely consolidative and the price is unable to break clear of the 61.8% Fibo of the recent bearish wave from  17th Oct highs to 26th Oct lows.  

All data supports downside bias in AUD/USD, but…

For the most recent data from the  US,  we have consumer confidence at  18-year  highs driven largely a robust  labour  market, suggesting strong economic growth could persist in the near term,  a solid ADP report that showed  that the private sector rose by 227K in September to surpass the market expectation of 218K. Then in contrast, we have  Australian inflation that remained weak in the September quarter ,decelerating to 1.9% y/y from 2.1% y/y in June – (set to keep the RBA on hold for long), while China’s factory growth weakened to the lowest level in last two years with the slump in export orders deepening.

Here lies the argument for a strong Yuan and Aussie

However, there lies the case for a strong Yuan and Aussie. While one would expect the Aussie and Yuan to fall on such data, especially as the DXY goes on to make fresh highs on the 97 handle  vs a basket of currencies, the SSEC actually extended its opening gains after the data where investors now believe that Xi will now be  coerced   into agreeing on a trade deal with the Trump as soon as the Nov 26th Summit in Buena Aries which in turn would lift markets and sentiment around the Chinese economy.

In fact,  the CNH strengthened from a new 10-year low versus the USD to 6.9710 from 6.9780 after the disappointing data on such sentiment. This is also proving that the 7.0000 level is going to be a very important level of resistance that will likely be fixed and unbreakable, making for a better risk-reward scenario to the downside for USD/CNH and therefore to the upside for AUD/USD regarding value.  

The market was already optimistic over a trade deal and skewed tot he upside, and we are seeing a follow-through of that optimism today on Wall Street, underpinning risk and the Aussie. However, the climate for the greenback is still favourable on good old-fashioned Central Bank divergence. Also, the resilient U.S. economy remains as a trump card in the bull’s hands as are ongoing  concerns  about *Turkey, Brexit and the Italian budget and, indeed, Chinese growth as we head into next week’s midterms whereby ore uncertainty could well keep the dollar underpinned with eyes on    97.87, the 61.8 Fibo of the 2016-2018 rise.

AUD trades as a proxy to Turkey’s woes

* In terms of Turkey, the latest news there has seen the Lira drop, and the Aussie tends to track the  performance  of emerging markets and the commodity complex as a whole.  

“A few hours after Turkey’s central bank published its inflation outlook which envisages consumer prices remaining well above the official target at least until 2020, Treasury and Finance Minister Albayrak announced a wide range of tax cuts,” analysts at Rabobank explained. “While this is an attempt to ease the burden on battered Turkish households, the announcement reignited the upside pressure on USD/TRY and EUR/TRY.”

The analysts explained that such a reaction implies that the market could be concerned that the central bank may not be sufficiently supported by the administration in its efforts to rein in inflation. “After all, the purpose of lower taxes is to revive consumption, which is inflationary.”

In conclusion, there are arguments on both sides for the Aussie, and it should be noted that if there is positive traction on trade wars and the political climate in Europe, the dollar could take a hammering as markets reposition favouring the upside in AUD. A break in the DXY below the  rising 95.89 21 DMA would be significant.  

AUD/USD levels

We have near-term resistance at 0.7105 as the 61.8% Fibo. Then 0.7170 where there is the confluence of the 50-day SMA and 1st Oct low. To the downside,  we have the 10-day MA at 0.7063 and then the trend low at 0.7021. Analysts at Commerzbank explained that “AUD/USD continues to recover near term and we would allow for a rally to the  55-day  moving average at 0.7183 and the 0.7260 2018 channel and while capped here this will leave the market under overall pressure.”