The Australian dollar has reversed course on Tuesday, falling from a high of 0.7311 as European markets opened when a surge in US yields sent the US dollar firmly bid across the board. At the time of writing, AUD/USD is down 0.6% on the day and trades near 0.7235, hovering over the lows of 0.7228 and on thin ice, technically speaking, testing below daily trendline support.
AUD can't stay up on good news
Initially, AUD/USD gained ground on Tuesday, helped by high resource prices and the blistering pace of vaccinations at home. The price moved from 0.7250 to a high of 0.7294 by the close of play on Monday before moving to Tuesday's highs following data in the Asian session that showed Aussie Retail Sales fell 1.7% in August when analysts had expected coronavirus lockdowns in key states such as New Soth Wales and Victoria to cause a 2.5% drop. However, any optimism in the data over an acceleration in vaccinations was short-lived.
AU/US yield spreads weigh on on AUD/USD
There are still doubts about the speed of global economic re-opening and the Reserve Bank of Australia (RBA) is still insisting it will hold rates at 0.1% out to 2024, which kept local two-year yields down at just 0.024%. As a result, the spread between Australian and US yields have widened significantly which is weighing on AUD/USD in NY trade.
Meanwhile, the US dollar climbed to its highest level in more than 10 months on Tuesday as a rise in US Treasury yields made the mighty US dollar more attractive to investors. US Treasury yields have surged since the end of last week following the hawkish twist at the Federal Reserve. The chairman, Jerome Powell, advocated for tapering to start sooner than markets might have expected considering a contraction in the latest Nonfarm Payrolls report.
However, that report was just one many reports that have been otherwise very encouraging so the Fed are more inclined to look through the glitch in anticipation of better data to come in imminently. Powell said that the central bank will likely begin reducing its monthly bond purchases as soon as November and the dots have hinted that interest rate hikes may follow in the second half of 2022. On Tuesday, the benchmark 10-year Treasury yields hit a three-month peak at 1.544%. Moreover, there are expectations that infrastructure spending is going to get done which will see a lot more Treasury supply which should drive up yields, supporting the US dollar.
Wall Street is in meltdown
Additionally, AUD/USD is being hit by a tumble on Wall Street and risk sentiment. The S&P 500 and the Nasdaq headed for their worst day in four months on Tuesday as weak consumer confidence data deepened concerns over slowing economic growth.
The surge in Treasury yields has hit mega-cap technology stocks. US consumer confidence this month unexpectedly fell to its lowest since February, as soaring COVID-19 infections intensified concerns about the economy's near-term prospects. At 17.48 GMT, the Dow Jones Industrial Average was down 544 points, or 1.57%. The S&P 500 was down 86.40 points or 1.94% and the Nasdaq Composite was down 403 points, or 2.65%.
Overall, the many cross-currents in the forex space right now, such as Evergrande, Delta, and the US debt ceiling are a weight on risk and that is going to prevent proxy currencies such as the Aussie gaining traction for long, even on positive news. The US dollar smile theory continues to play out.
AUD/USD technical analysis
As per yesterday's pre-Retail Sales technical analysis, AUD/USD Price Analysis: Retail Sales risk ahead, bears testing 0.7270 key zone, where it was noted that there would be risk of a bounce on positive data before the next move to the downside, the price action has behaved in accordance with the analysis.
it was stated that should the neckline hold, there will be prospects of an upside continuation should the data surprise as more robust than forecast.
AUD/USD hourly chart
''As illustrated, the price has made a 50% mean reversion to the neckline of the formation. This would be expected to hold into the data today.''
Live market update
As illustrated above, the price did indeed move higher on the data only to succumb to selling pressures below the 50% mean reversion level.
AUD/USD daily chart
It was explained that from a daily perspective, ''following the 61.8% Fibonacci retracement, the price is resisted below the 21-day moving average and bears will be looking for a downside extension of the daily bearish impulse.
The dynamic trendline support will first need to give and on a retest, bears could well be encouraged to move in.''
''The -272% Fibonacci retracement level of the correction comes in near 0.7190. Thereafter, 0.7160 will be pressured at the -61.8% that has a confluence with the 20 Aug highs.''
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