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The parabolic moves on USD/CNH has seen AUD and Asian currencies in general come under pressure. So, with its break to a fresh 11-month high today, AUD/USD is back under the spotlight for a move lower.
Last month USD/CNH endured its second most bullish (and volatile) month on record and its ascent has continued into July. If this were any other chart, we could argue a deep correction could be approaching due to the general lack of mean reversion. But, as China is allowing their currency to devalue in response to a trade war with the US, these are not normal circumstances where mean reversion is concerned.
Since the trade war between the US and China erupted, the intraday correlation between AUD and CNH has been strong. If CNH weakens, bears are shorting AUD as a weaker CNH is seen to eventually hurt the Australian economy. Whilst this may be a simplistic overview, it goes something like this.
CN weaken currency > CN exports rise > AU trade balance weakens > weaker AU growth > traders short AUD anticipating weaker economy.
Of course, a stronger USD also exacerbates the issue for AUD/USD so, with CNH hitting an 11-month low today AUD/USD is worthy of another look.
We can see on the daily chart that key support around 0.7329 has managed to hold and provide a bounce higher. However, since its rebound to 0.7484, bearish momentum has returned and a lower swing high has made its mark. That we remain within a bearish channel with predominantly bearish momentum, we suspect AUD will eventually go on to break the 0.7311 low. And with no obvious levels of support in view, the 2016 and 2017 lows at 0.7145/60 will be within plain site for bears. That said, if the trade war is to die down we could see a sharp reverse of these moves but, for now at least, price action points lower.
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