AUD USD slides to key downside target

AUD/USD has been under critical pressure since the beginning of the week (and New Year) as China’s financial and economic troubles have weighed heavily on the China-linked Australian dollar.

This pressure has culminated in the currency pair breaking down below an important uptrend support line extending back to September’s 6-year low around 0.6900, and hitting major psychological support at the 0.7000 level. In the process, AUD/USD has just established a new 3-month low as of Thursday.

With circuit breakers for China stocks having already been triggered two days this week due to declines of 7% in the benchmark China index, thereby halting trading early for each of those days, financial market conditions in China, Asia, and around the world have suffered substantially.

Thursday afternoon saw a moderate rebound for most major equity markets after China regulators announced a suspension of stock market circuit breakers. This action ostensibly removes a market mechanism that may have been causing additional anxiety for already-spooked investors in China.

Despite this move by Chinese regulators, China markets remain on exceptionally shaky ground. This heightened volatility may continue to weigh heavily on AUD/USD, even as the US dollar has experienced a modest pullback.

On the US dollar side of the currency pair, Friday’s US Non-Farm Payrolls and Unemployment Rate reports should make a significant impact on the greenback, possibly spurring a rebound if Wednesday’s private employment data are any indication of what is to come on Friday. The ADP Non-Farm Employment Change numbers on Wednesday showed a substantially better-than-expected increase in US private sector jobs – 257,000 jobs added against prior expectations of 193,000.

In the event that the US dollar does indeed rebound while China worries continue to weigh on the Australian dollar, AUD/USD could have significantly further to fall. Under the noted 0.7000 psychological support level, the next major support target is at the key 0.6800 level, which would confirm a continuation of the sharp and longstanding bearish trend.