AUDUSD EYES CHINA TRADE BALANCE, RBA COMMENTARY
- The Australian Dollar appears at risk of further downside which could be fueled by disappointing China Trade Balance data due for release Thursday
- AUDUSD implied volatility looks low in consideration of recent US-China trade war developments and dovish shock from the country’s neighboring central bank
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In our most recent Australian Dollar outlook, we highlighted how AUDUSD in particular is exposed to downside risks stemming from the US China trade war. Despite the Reserve Bank of Australia (RBA) providing language slightly more hawkish than was expected, Governor Philip Lowe still reiterated the central bank’s willingness to ease monetary policy further if needed. That said, Thursday’s release of China trade balance data could provide Australian Dollar bears with another bit of evidence that the RBA will likely need to cut rates again in the near future.
CHINA TRADE BALANCE – IMPORTS (YEAR-OVER-YEAR, USD)
The Australian economy is closely tied to China with approximately one-third of Australia’s exports shipped to be consumed by the Chinese. Seeing that the Chinese economy has come under immense pressure as of late owing to the ongoing trade war with the United states, it appears likely that the trend of declining imports will continue which stands to sink spot AUDUSD. Another anecdote that might suggest additional weakness for the Aussie ahead is the relationship between AUDUSD and USDCNH.
AUDUSD PRICE CHART OVERLAID WITH CHINESE YUAN: DAILY TIME FRAME (JANUARY 24, 2019 TO AUGUST 07, 2019)
Chart created using TradingView
The Chinese Yuan, illustrated as CNHUSD in blue above, continues to weaken in light of US China trade war developments as uncertainty runs rampant and fears of slowing GDP growth mount. With the latest flareup in trade war tension, risk assets have spiraled lower along side the Chinese Yuan. As such, given the strong correlation between AUDUSD and CNHUSD, it is not inconceivable that spot AUDUSD could keep marching lower as the currency pair carves fresh multi-year lows dating back to the great financial crisis.
RBA INTEREST RATE PROBABILITIES
Additionally, expectations for the RBA to cut interest rates again this year have surged. Aside from the resurgence of US China trade war risk, the jump in the probability that the RBA policy interest rate will be halved to 0.50% by the end of 2019 was likely propelled further by a surprise 50bps interest rate cut by the Reserve Bank of New Zealand – a neighbor to Australia with closely intertwined economies. Consequently, the RBA is likely to follow suit of the RBNZ with more accommodative monetary policy.
AUDUSD PRICE CHART: DAILY TIME FRAME (DECEMBER 14, 2018 TO AUGUST 07, 2019)
According to AUDUSD overnight implied volatility of 10.35%, spot prices are expected to fluctuate between 0.6725-0.6798 with a 68% statistical probability. Yet, the overnight implied volatility reading for the Aussie seems a bit low considering the current market dynamics and looming risk catalysts.
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