Chart of the day: Why the Chinese yuan is driving AUD lower
AUDUSD tested support at 0.6700 in overnight trading and looks set to push into the strong buy zone today.
The potential economic fallout from the coronavirus is driving AUDUSD lower. The Australian dollar is significantly sensitive to movements in the Chinese yuan (CNH). It’s worth noting that USDCNH tested the critical 7.000 level at the same time AUDUSD moves into what has been a strong buy zone.
Over the last two years, AUDUSD and USDCNH display a very strong negatively proportional correlation (correlation coefficient -0.909 by value), and movements in USDCNH account for 82.6% of variation in AUDUSD daily moves.
Due to the correlation, flip to the USDCNH chart and see price action rejected a break above the top of the channel at the 7 level. If CNH strengthens (USDCNH moves down), we’ll have a buying opportunity in play. But if the outbreak poses an increasing threat to the Chinese economy and CNH weakens beyond 7 USD, AUDUSD could indeed break through support here.
Otherwise watch the RBA meeting on Tuesday. Probabilities of a rate cut have pared right back to 12.8%, so don’t expect much of a move if the RBA confirm rates are on hold. A dovish outlook and the forex pair moves lower; a more upbeat outlook and AUDUSD bounces off support.
Ready to trade?
It's quick and easy to get started – even with a small deposit. Apply in minutes with our simple application process.
Pepperstone doesn’t represent that the material provided here is accurate, current or complete, and therefore shouldn’t be relied upon as such. The information provided here, whether from a third party or not, isn’t to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product or instrument; or to participate in any particular trading strategy. We advise any readers of this content to seek their own advice. Without the approval of Pepperstone, reproduction or redistribution of this information isn’t permitted.