Dr Copper diagnoses AUDUSD relapse

Summary

Pressures that could see the Aussie dollar resume its secular downtrend continue to mount

Yuan spiral drags Aussie

It’s little surprise the Aussie is tracking the yuan’s trade-related declines down to new cycle lows. As the most liquid proxy for China’s currency, Australia’s dollar is bearing the brunt of trade/tariff headwinds that have dragged the yuan to 11-month lows and the Aussie its worst in almost 14 months. On Wednesday, the yuan showed signs of stabilisation after People’s Bank of China assurances that it would keep the currency stable. However, weakened CNY and AUD market structures suggest they are likely to keep trending lower, even if rebounds gain traction on a near-term horizon.

Dr Copper ails

For one thing, a rout in copper prices also reached a multi-month low on Wednesday, tracking fears of weakening demand from the largest consumer of this key Australian export, China. Below, we chart both AUD/USD (main chart in Figure 1.) and the spread between COMEX copper futures continuation data and Aussie (sub-chart). One basic observation is that the spread and Aussie appear correlated. The spread widens when AUD/USD rises, and tightens when AUD/USD falls. Therefore, recent spread tightening may either be a short-term artefact, or, it may precede a longer-term narrowing that coincides with deeper AUD/USD weakness.

Low bounce?

Hence Aussie’s bounce at $0.7308 on 2^nd July (Figure 2.) may prove to be more limited than buyers would hope. The move completed a successful test of critical support comprised of the June 2017 quarterly low at $0.7326. However, that move is contained within a longer-term trend showing a breakdown from the rising wedge that spanned July 2015 to February this year. In other words, the broken wedge may represent the end of a continuation pattern preceding resumption of the secular 2011-2016 downtrend.

A key test

As such, should the pair definitively fail at $0.7445—swing support on a daily close basis in May and late-June resistance—we would expect sellers to regain control. AUD/USD does appear to have upward momentum on its side, looking at the stochastic oscillator that swung out of the oversold zone last month and remains ‘neutral’ with plenty of room before overbought levels. This adds ambiguity to a forthcoming test of the upper declining trend line of the channel in place since January. An upward sustained break could invalidate the long-run bear case. With Aussie underperforming long and ultra-long term moving averages though, for now, it remains poorly positioned for anything but short-lived up moves.