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Chart of the Day: AUDUSD

Right now it’s all eyes on USDCNH and the daily CNY (yuan) “fix” by the People’s Bank of China, which takes place every day at 11:15 AEST. While we can debate that risk assets, such as equities, were oversold anyhow, the fact the PBoC refrained from significantly depreciating the yuan yesterday when it came to setting the midpoint of USDCNY was enough of a catalyst to compel traders to cover some of their defensive trading positions. (You can learn more about the fix through the working paper titled “Recent RMB policy and currency co-movements” by the Bank for International Settlements.)

Chart of the Day - Aug 7, 2019 - AUDUSD, weekly

With USDCNH finding better sellers, the world breathed a sigh of relief, but out of the woods we aren’t. USDCNH remains central to broader market movements. AUDUSD is interesting, as Australia’s fundamentals matter little at present. The pair is closely tracking USDCNH, with traders seeing the AUD as a G10 FX proxy of the trade tensions. For context, the daily correlation coefficient between AUDUSD and USDCNH over the past six months (using the exchange rate value, as opposed to percentage move) is -0.80. So, statistically, 80% of the variance in the AUDUSD can be explained by USDCNH. That’s significant.

We can also see two interesting factors. Firstly, the AUDUSD is testing the December flash crash low, and one’d expect some support to kick in here. Secondly, there’s divergence between price, which has formed a lower low and the RSI that’s printed a higher low. We need the price to prove itself, but divergence can be a powerful reversal indicator. That’s one to watch. But unless we see a sustained move lower in USDCNH and better trending conditions in global equities, traders will use strength in AUDUSD as a selling opportunity.

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