AUD/USD guillotine drops on the heads of the bulls

AUD/USD is currently trading at 0.7167, melting away tot he downside having already lost some 0.77% at the time of writing to renewed complications fo  |  22/09/2020 20:16
  • AUD/USD rally loses its head as the RBA confirms drastic policy options that are still on the table.
  • AUD/USD now depends on domestic global economic data and risk sentiment in the build-up to the RBA.

AUD/USD is currently trading at 0.7167, melting away tot he downside having already lost some 0.77% at the time of writing to renewed complications for the bulls. 

As it stands, the Aussie has been the second-worst performing G10 currency on a 1-day view. 

There is a complicated mix of reasons for the sudden drop in demand for the currency, but the supply is mostly about the market's rethink of the path for the global recovery, for which AUD is closely correlated to.  

USD correcting back to life

First and foremost, the US dollar has started to show signs of life again.

 

Fears of another wave in Covid-19 clashing with the US flu season is hurting risk appetite.

Also, with Europe becoming the new epicentre, this potentially strips the political stability trade out from beneath the euro which too will have supported the US dollar.

The Federal Reserve did little to appease bulls on Wall Street when it failed to meet expectations of additional stimulus at its last interest rate decision meeting. 

Additionally, the death of US Supreme Court Justice Ruth Bader Ginsburg will make the passage of another stimulus package in Congress less likely before the Nov. 3 presidential election.

This event has been sparking large declines in the healthcare sector and stocks in general.

Washington appears to be no closer to a possible fourth stimulus package.

Congress has for weeks remained deadlocked over the size and shape of another coronavirus-response bill, on top of the roughly $3 trillion already enacted into law.

Lastly, uncertainty around the US election and China-related tensions are all risk factors for which the US dollar is considered as a haven. 

Then the guillotine dropped

All it took was a reminder from the Reserve Bank of Australia officials that negative rates and forex market intervention were options that are on the table to see the head of the AUD/USD rally well and truly cut off.

The RBA's deputy governor, Guy Debelle, referred to intervention to negative rates as “possible”. 

AUD/USD fell 0.4% right off the bat on the remarks. 

Whether or not this happens depends crucially on the labour market, wage and price developments in the coming months. However, with so much slack in the global economy, we would judge that such a move could be considered as ‘likely’,

analysts at Rabobank argued, referring specifically to a rate cut.

Given that the prospect of further RBA policy moves is on the table, the AUD is set to be more sensitive to economic data releases in the build-up to the October 6th interest meeting.

AUD/USD levels

A restest of the 0.72 figure could come into play again if 0.7150 holds these initial tests. 

A firm resistance in the lows of the 9th and 10th Sep ranges in 0.7190/12 will be expected to result in a fresh wave of supply towards 0.7020, especially if USD short covering kicks-in significantly.

 

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