More Pain In Store for AUD, Falling Yuan is a double whammy for Australia

More Pain In Store for AUD, Falling Yuan is a double whammy for Australia

Trade Recommendation

  1. Sell Limit @ 0.9050- 0.9150 Target 0.8542 Stop Loss 0.9350 (on weekly closing basis)

More Pain for Australian Dollar...

  1. By now, it is well known that fall in Australian dollar was mainly driven by concerns of slowdown in China, biggest market for Australia's export driven economy
  2. So far the weakness in AUD/USD was accompanied by strength in Chinese Yuan - which means fall in AUD/USD so far is just beginning as actual slowdown in China should have been accompanied by fall in Yuan 
  3. For past 8 to 10 trading sessions, we have seen mild recovery in Australian Dollar and sharp decline in Chinese Yuan

In my opinion, falling yuan is a death rattle for Australian Dollar because -

  • Fall in Yuan against US dollar also means that Yuan is weakening against the Australian Dollar.
  • Remember  that Australia is dependent on China and not the other way round, which means fall in Yuan against AUD erodes the competitiveness of Australian exports.

This is a double whammy for Australia because

  • slowdown in China anyways weakens AUD
  • Add to that the ongoing and future fall in yuan, and we have competitive devaluation forces taking control of AUD.
  • Either this competitive devaluation would be undertaken by RBA or by market forces or both.
  • In simple words, till now Australian exports and currency were hit down by sentiment and actual Chinese slowdown. But now both would be hit by weak Yuan as well.

In all cases, AUD/USD appears a strong sell trade.

  • RBA: might cut rates and/or verbally intervene time again to weaken AUD and save exports or
  • Market Forces: eventually ditch AUD fiercely in response to rising trade deficit, this time pushed even more higher by weakening CNY

How far can Chinese Yuan fall and why? 

Deriving a specific target for Yuan in long term is not my cup of tea as I feel the size of economic adjustment in China is so huge that calculating exact levels is unrealistic. But I have discussed my rationale for weak Yuan and Yuan being a big long term sell trade in my blog posts here...

  1. http://www.forexstreet.net/profiles/blogs/reer-study-pound-yen-euro...  (18th Feb)
  2. http://www.forexstreet.net/profiles/blogs/global-linkages-past-pres... (6th Feb)

Technical Development

AUD/USD Monthly Chart

  • Pair has immediate resistance of 0.8973
  • The pair is trading below critical 38.2% retracement level of 0.9141
  • The pair has trend line resistance around 0.9200 today. March month candle would face trend line resistance around 0.9050
  • Given the sharp fall in last three months, a correction can last up to 0.91-0.92

Given the overall macro and technical situation, I hold bearish view on AUD/USD. 

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