AUD / USD Hidden Bearish Divergence Opens Risk at 0.7315

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  • AUD / USD is at the mercy of external factors for the coming week.
  • AUD / USD is poised to correct itself from the recent rally as it begins to decelerate.
  • The neckline of the W formation converges with both the 21-day moving average and the 61.8% golden ratio.

AUD / USD starts flat in a quiet start to the week so far. At the time of writing, the AUD / USD is trading at 0.7414 and is hovering within a few pips of a range sitting on the smoothed 1 hour 10 moving average.

Conditions for commodity currencies have been positive for the AUD which has benefited from the forex inflation hedge since the Federal Reserve has become much more hawkish lately. A specific notice was also paid to offshore stocks and US rates. In this regard, US stocks held onto their firmer bias on Friday as investors encouraged better than expected retail sales growth for September along with positive results.

Stagflation concerns appeased

Stagflation fears have been a thorn in the side of the markets lately as the Federal Reserve has started to recognize that inflation may not be so transient after all. This even at a time when data had started to run out of steam and lead to a potentially cold winter and in the aftermath of the global energy crisis, underpinning fears of stagflation. However, the better data and performance of US stocks coupled with weaker core CPI and PPI data in September earlier in the week went a long way in allaying those fears and supporting risk-linked forex like the AUD.

In the markets, the S&P 500 ended up 0.8%, the Euro Stoxx 50 up 0.8% and the FTSE 100 up 0.4%. The yield on the US 10-year note rose 6 basis points to 1.57% as bond prices were hit by a better risk tone. Meanwhile, oil prices continued to be problematic, with WTI rising another 1.7% to $ 82.7 / bbl. On the other hand, iron ore futures have been supported by new supply issues. “Rio Tinto has lowered its iron ore export expectations this year to 320-325 million tonnes from 325-340 million tonnes, due to labor shortages in Western Australia,” said today ‘hui analysts at ANZ Bank in a note.’ ‘

However, dark clouds are forming over Australia’s economy despite news that the country’s second largest city will see restrictions easing later this week. Instead, there is a watchful eye for the Evergrande contagion, a collapsing housing sector in China and negative ramifications for Australia’s export-dependent economy. When Cina sneezes, Australia catches a cold. In this regard, investors will be watching key China’s economic data today (including gross domestic product) for any signs of weakness amid energy shortages.

External factors impacting the AUD this week

Meanwhile, markets have largely ignored some rather grim data on employment in Australia, which has clearly shown the profound impact of recent Covid-19 restrictions in the country. That being said, markets don’t expect the Reserve Bank of Australia to be so worried about the outcome, given that it has already factored in some poor results expected from the summer covid crisis.

The RBA has already pledged to keep its policy on hold until February. However, the focus will be on the minutes of the October RBA policy meeting in this regard, but external factors, such as Chinese data, will be key. On a poor result, AUD / USD could struggle as high as 0.7460 in September.

AUD / USD technical analysis

From a technical standpoint, we have a hidden bearish RSI divergence on the daily chart as follows:

We saw the same not too long ago which led to a further downward trend as follows:

As illustrated, HBD led to a new low in the cycle. HBD is a leading continuation indicator that traders can use to help them make trading decisions. In this regard, there are prospects that the following will play out in the coming days:

AUD / USD is poised to correct itself from the recent rally as it begins to decelerate. This exposes the neckline of the W formation which has confluence with both the 21 day moving average, the 61.8% golden ratio and in the hidden bearish divergence. 0.7315 is eyeing.


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