AUSTRALIAN DOLLAR FORECAST: AUD/USD & AUD/JPY PIVOT LOWER ON RENEWED US-CHINA TRADE WAR TENSION AMID CORONAVIRUS PANDEMIC
The Australian Dollar recorded an impressive rally over the last few weeks. Australian Dollar strength since its March low was exerted against anti-risk currencies, like the US Dollar and Japanese Yen, in particular.
This mirrored a broad improvement in market sentiment, which came on the back of unparalleled liquidity and fiscal stimulus measures from major central banks and governments, as well as an influx of virus optimism. Recent Australian Dollar upside has also corresponded with the retracement in currency volatility.
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Although, considering a coronavirus recession is likely unavoidable, and materially threatens the pro-risk Australian Dollar, can the recent advance by AUD/USD and AUD/JPY extend higher? Or is the Australian Dollar gearing up for a larger reversal?
AUSTRALIAN DOLLAR PRICE OUTLOOK IMPROVED AS VOLATILITY FADED, CORONAVIRUS RECESSION STILL THREATENS TO REKINDLE RISK AVERSION
Chart created by @RichDvorakFX with TradingView
Closely correlated to the S&P 500 VIX Index, and trader sentiment in general, the Australian Dollar remains vulnerable to a broader reversal, and could follow the return of volatility. This bearish scenario for AUD price action appears increasingly likely as complacency builds and market participants refuse to acknowledge progressively woeful economic data.
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If FX volatility ebbs again, however, the Australian Dollar might continue its recent ascent. Though this seems unlikely for now in light of the latest China tariff threat from Trump, and renewed Sino-American trade war tensions. Australia GDP is closely tied to its largest trading partner – China – the second largest economy in the world. In turn, growing US-China trade war tension could pressure the Australian Dollar lower. Furthermore, the technical backdrop for AUD/USD and AUD/JPY paint bleak pictures for Australian Dollar outlook.
Read More – Trade War History: Impact on Global Trade and Financial Markets
AUD/USD PRICE CHART: WEEKLY TIME FRAME (OCTOBER 2017 TO APRIL 2020)
The Australian Dollar faces a pivotal inflection point as AUD/USD price action rallies into a huge area of resistance. This technical barrier, which threatens to send AUD/USD recoiling back lower, is highlighted by a confluence of its 20-week moving average and 38.2% Fibonacci Retracement level of the January 2018 to March 2020 trading range.
| Change in | Longs | Shorts | OI |
| Daily | 1% | -7% | -4% |
| Weekly | -5% | -9% | -7% |
AUD/USD PRICE CHART: DAILY TIME FRAME (DECEMBER 2019 TO APRIL 2020)
Zooming in on a daily AUD/USD chart shows the Australian Dollar is already starting to edge lower with a bearish reaction to its upper Bollinger Band near the 0.6500 price level. Technical support, underpinned by the 61.8% Fibonacci retracement of its year-to-date trading range, may provide AUD/USD a degree of buoyancy. Although, Australian Dollar selling pressure could accelerate if spot AUD/USD price action invalidates its short-term bullish trend noted by the recent series of higher lows.
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AUD/JPY PRICE CHART: DAILY TIME FRAME (DECEMBER 2019 TO APRIL 2020)
A daily AUD/JPY chart also reveals how the Australian Dollar could come under pressure after rejecting the 70.000 handle – a massive zone of confluent resistance noted by the 100-day exponential moving average, March 08 gap lower, 61.8% Fib, as well as the top barrier of its rising wedge pattern. Yet, AUD/JPY might keep marching higher, perhaps toward the 74.000 price mark, if trader risk appetite remains upbeat and volatility compression bolsters the currency carry trade.
| Change in | Longs | Shorts | OI |
| Daily | -4% | 4% | 0% |
| Weekly | -8% | -11% | -9% |
Nevertheless, the path of least resistance seems lower and risk appears tilted to the downside. A breakdown below the positively-sloped support trendline, extended through the recent string of higher highs and higher lows, could exacerbate Australian Dollar weakness against the Yen. If this materializes, it may prompt Aussie bears to make a push for a retest of the March 18 swing low, which is a scenario that may warrant additional credence amid a violent return of risk aversion.
— Written by Rich Dvorak, Analyst for DailyFX.com
Connect with @RichDvorakFX on Twitter for real-time market insight
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