- AUD/USD bears are lurking in the throes of a downside extension below 0.7220.
- Bulls to target 0.7280 resistance for a shot at 4-hour 200-EMA and bullish territory above 0.7300.
- 1:2 R/R day-trade set up below 0.7250 on the bear’s watchlist.
AUD/USD ended Friday under pressure as the US dollar strengthened on both the Evergrande risks and as markets contemplate Federal Reserve tightening. AUD/USD closed the New York session at 0.7256 and had travelled from a high of 0.7316 to a low of 0.7236.
The DXY index, a measure of the US dollar vs a basket of currencies, was poised for its third straight week of gains as the uncertainty over beleaguered Chinese property developer Evergrande helped the greenback bounce back from a sharp decline in the prior session.
Evergrande debacle a major risk to AUD
China Evergrande Group owes $305 billion and has run short on cash, missing a Thursday deadline for paying $83.5 million. However, the company has a 30-day grace period but the question is whether it will make the payments before the deadline. A collapse of the company could create systemic risks to China’s financial system which has negative ramifications for global markets.
The safe-haven dollar had its biggest one-day percentage drop in about a month on Thursday after Beijing injected new cash into the financial system and Evergrande announced it would make interest payments on an onshore bond, boosting risk sentiment.
While Wall Street’s bellwether, the S&P 500, posted a slim gain on Friday, major European markets slumped as investors weighed a potential fallout from debt-laden China Evergrande. Additionally, MSCI’s gauge of stocks across the globe shed 0.15% after three days of gains, leaving the index little changed for the week.
The Evergrande debt resolution is far from clear which is an overhang of immense risk for Australia’s iron-ore market and ultimately, the Australian dollar. Positioning in the currency is already very negative, but a short squeeze is not insight given both domestic and downside risks continue to pile up.
Australia is the most China-dependent country in G10 and has already lost about $6.6 billion in revenue to the Chinese market between July 2020 and February 2021. This came as a direct consequence of Beijing targeting its exports with heavy tariffs, claiming they were part of ‘anti-dumping measures. Another hit to the iron ore market could be the straw that broke the camel’s back with respect to the Aussie.
Incidentally, the Reserve Bank of Australia has officially “frozen” its policy until February 2022. Therefore, data in the next few weeks may have a somewhat more limited impact on the currency and the focus will remain off-shore for the week ahead. August Retail Sales will be eyed, however.
By Ross J Burland for FXStreet