AUD: Fade the bounce - TDS

AUDUSD has re-entered primary downward trend channel after breaking key support, notes Research Team at TDS.

Key Quotes

“As we hoped, AUDUSD took a turn for a worse. With a break of trendline support from the lows set on Jan-2016, AUDUSD may have re-entered the primary downward channel which began in April 2013. Against this backdrop, along with the slew of event risks this week, AUDUSD remains vulnerable. We downside potential towards 0.7150.”

“We think AUDUSD rallies should be sold into though there are clear thresholds. After acting as support, the 0.7450/0.7500 area now represents a resistance area should be viewed as the first sell zone. Given where spot is trading however, we prefer to allow greater topside cushion and view a fade the bounce strategy as viable towards 0.7550. A break above would have us reconsider the near-term outlook for AUDUSD, but we think this outcome is unlikely.”

“We view downside in AUDUSD as the low hanging fruit in the G7 complex right now, as significant realignment risks remain and have barely been corrected. Indeed, our ‘realignment hazard index’ continues to flag that the AUD remains the preferred candidate to weaken against the USD within the G7. While the latest IMM positioning data suffers from timeliness, it still points to an overhang of AUD longs among the leveraged community suggesting that liquidation is far from complete and has more room to run further.”  

“While we think that the market is in part, irrationally exuberant over potential impact of US fiscal policy, UST yields are likely to remain elevated. Against this backdrop, the appeal of AUD as a high yielder becomes less compelling, especially as fewer sovereigns are yielding in negative territory. Indeed, we estimate that roughly 25% of developed market debt is now yielding negative (~40% in June). This should act as the catalyst needed to trigger a re-coupling between FX/rate spreads on the basis of a portfolio rotation which has benefitted the AUD since Brexit. Indeed, spot/rate divergences have been very prominent with AUD/crosses.”

“Though we think the USD’s ascent has been rapid, we still favor USD firmness into early 2017. This dynamic may be compounded with upcoming potential pitfalls including Italian/UK politicking, which may undermine risk sentiment.”