AUDUSD could Move Lower if Stocks Cant Bounce Higher

For all the talk we got about month-end buying because of pension fund rebalancing, it turned out to be  a quiet day, comparatively speaking.  The range on the day today in the S&P 500 was only 77.25 handles!  This was not only the smallest daily range of the month, but also since February 21^st when the range was 41.25 handles.  Today’s price action did put in the highs of the last 6 trading days when price bounced off long-term horizontal support just below 2200.  Price then bounced to the 38.2% retracement level from the February 20^th highs to the March 23^rd lows near 2643.25 and held, trading lower into today’s close. 

Source: Tradingview, CME, City Index

If the stock index can not get any higher than the 38.2% retracement, then this could prove to be a dead cat bounce.   And if that is the case and stocks do move lower, then the AUD/USD has plenty of room to fall.  As we can see on the bottom of the daily chart, AUD/USD and the S&P 500 are currently highly correlated.  The correlation coefficient is +0.91.  For comparison, a correlation coefficient of +1.00 means that the two assets are perfectly correlated and move together 100% of the time.  AUD/USD fell with stocks at the end of February as worries of the coronavirus spread throughout the world.  On March 19^th,  the pair put in a low of .5504 before bouncing to the 61.8% retracement level from the February 20^th highs to the March 19^th lows. (There is also a long-term downward sloping trendline from May 2018 which crosses at that same level). 

Source: Tradingview, City Index

Since AUD/USD bounced to the 61.8% Fibonacci retracement level, and the S&P 500 only bounced to the 38.2% Fibonacci retracement level, and the trading instruments are highly correlated, then it would make sense that if stocks sold off and made new lows, that AUD/USD would move lower as well! 

Keep an eye on this correlation to see if continues to hold.  AUD/USD could be in trouble if stocks do move lower!