We have seen a big rally in terms of the AUD on the USD but we are now stalling and expect a turn to the downside and major sell off – the logic of our view is outlined below.

The Interest Rate Outlook

In terms of the Fed investors September and anticipating 68 basis points of easing this year so potentially up to three cuts. In terms of the RBA, where traders are continuing to price in the risk of a rate rise to 4.6 percent at the Reserve Bank of Australia’s next board meeting in August after inflation last month came in above market expectations. We may see three cuts from the Fed but that's discounted and we dont think the RBA will raise rates as they are well aware of the problems in China which is their major trading partner.

Risk on and the China Impact

Optimism about China has been a major factor in terms of risk on in the markets and also strength in commodity and high-risk currencies such as the Aussie: “The Chinese economy expanded 4.7% yoy in Q2 of 2024, missing market forecasts of 5.1% and slowing from a 5.3% growth in Q1. It was the weakest yearly advance since Q1 of 2023, amid a persistent property downturn, weak domestic demand, falling yuan, and trade frictions with the West. The latest figures came as the communist party began the Third Plenum, a key political event in which various reform measures are likely to be launched, along with recommendations for more support action to boost recovery.” (TRADING ECONOMICS)

China’s new home prices in 70 cities declined by 4.5% year-on-year in June 2024, after a 3.9% fall the previous month. It was the 12th straight month of fall and the fastest rate of decline since June 2015. There is a lot of optimism about the Third Plenum meeting helping to shore up the economy with stimulus but the Chinese are powerless to stop the economy deflating further...

“China's economy grew much slower than expected in the second quarter, as a protracted property downturn and job insecurity knocked the wind out of a fragile recovery, keeping alive expectations Beijing will need to unleash even more stimulus.” (REUTERS) The Chinese cannot unleash big stimulus packages due to the high levels of debt throughout the economy. We view the rallies in currencies highly correlated with China as selling opportunities.

We also have firm stock markets - if they break lower this impact on the Aussie and so to will an escalation of geo-political problems in Ukraine or the Middle East. 

Sentiment

On the chart below we can see that smart money commercial hedgers built up a major long position which warned of the AUD rally while speculators went heavily short. Last week though commercials sold out of longs and went short as speculators crossed and went long. Since the report was compiled last Tuesday we would have expected both groups to have increased their positions.

Technical Analysis

Our view of the key support and resistance levels to look out for on the chart below.