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AUD/USD Testing 20-Month Low On “Perfect Storm” Of Bearish News

By Kurt Osterberg · On August 31, 2018

As the final week of the month draws to a close, Aussie bulls are clearly licking their wounds.

The Australian dollar has been the worst-performing over the month, week, and day so far as the currency faces a “perfect storm” of bearish developments:

Industrial metals have come under selling pressure as the latest headlines suggest that US-China trade war will only escalate from here.

Meanwhile, tensions between Australia and China (its biggest trade partner) continue to rise, with China denying visas to Australian journalists and Australia banning China’s Huawei from its mobile network market.

Westpac, one of the “Big Four” banks, raised mortgage rates, putting further pressure on Australian consumers.

The country is going through political turmoil, with former Prime Minister Malcolm Turnbull resigning (more like Turn-Bear on the Aussie!) and replaced by Scott Morrison.

Yields on 10-year Australian government bonds have fallen from 2.70% at the start of the month to 2.52% as of writing.

The combination of the above factors has made it extremely unlikely that the RBA will raise interest rates any time soon. Indeed, markets are not pricing in a rate hike from the RBA until late next year, and there’s a risk that traders could push that view out toward 2020 (or even start to price in a potential interest rate cut) if the trade war continues to escalate.

Technically speaking, AUD/USD remains locked in a crystal-clear bearish channel. After peaking in the mid-0.7300s earlier this week, the currency has fallen to test its 20-month low near 0.7200 now. A break below this level would point toward a test of the prominent support levels from May and December of 2016 in the mid-0.7100s, and an even steeper drop cannot be ruled out. At this point, only a break back above the bearish trend line near 0.7400 would erase the bearish bias in the pair.

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