AUD/USD Bounces Back as Trump Fuels Hope for US-China Trade Deal

Australian Dollar Talking Points

AUD/USD retraces the decline from earlier this week as US President Donald Trump tweets that Friday will be a “big day of negotiations with China,” but little indications of an imminent trade deal is likely to drag on the exchange rate as it puts pressure on the Reserve Bank of Australia (RBA) to further embark on its rate easing cycle.

AUD/USD Bounces Back as Trump Fuels Hope for US-China Trade Deal

AUD/USD bounces back from a fresh weekly-low (0.6710) as President Trump insists that the first round of negotiations went “very well,” and hopes of a looming trade deal may fuel the recent rebound in the Australian Dollar as the Commander in Chief plans to meet China Vice Premier Liu He at the White House.

The end of the US-China trade war may push the RBA to the sidelines as it instills an improved outlook for Australia’s largest trading partner, and the central bank may look to conclude its rate easing cycle as Governor Philip Lowe pushes for “a renewed focus on structural measures to lift the nation’s productivity performance.”

In turn, the RBA may change its tune at the next meeting on November 4, but signs of a prolonged US-China trade war may force Governor Lowe and Co. to retain a dovish forward guidance for monetary policy as the dispute dampens the outlook for the Asia/Pacific region.

In turn, the RBA may reiterate its commitment to “to ease monetary policy further if needed,” and AUD/USD may face a more bearish fate over the remainder of the year if the central bank prepares Australian households and businesses for lower interest rates.

With that said,

In turn, the dovish forward guidance may continue to drag on AUD/USD, with the broader outlook still tilted to the downside as the exchange rate continues to track the bearish trend from late last year.

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AUD/USD Rate Daily Chart

Image of AUD/USD daily chart

Source: Trading View

  • Keep in mind, the AUD/USD rebound following the currency market flash-crash has been capped by the 200-Day SMA (0.6985), with the exchange rate marking another failed attempt to break/close above the moving average in July.
  • More recently, AUD/USD has taken out the September-low (0.6688) as it continues to track the downward trend carried over from late last year, with the Relative Strength Index (RSI) offering a bearish signal as the oscillator snaps the bullish formation from August.
  • However, the string of failed attempts to close below 0.6690 (50% expansion) may generate range-bound conditions, with the move above the Fibonacci overlap around 0.6720 (78.6% expansion) to 0.6740 (38.2% expansion) keeping the 0.6800 (61.8% expansion) handle on the radar.
  • Next area of interest comes in around 0.6850 (78.6% expansion) followed by the 0.6910 (38.2% expansion) region.

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.