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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.

AUDUSD daily chart

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.

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