AUD / USD bears seek a break below 0.72 as risk sentiment deteriorates

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  • AUD / USD collapses under pressure from risk aversion sentiment.
  • Eyes on Evergrande, the FOMC, iron ore prices, global stocks and futures markets.

At the time of writing, AUD / USD Is trading near 0.7245 and down over 0.2% in a risky mood. There are a number of factors at play that are dangerous ground for Aussie dollar traders this week.

On the one hand, investors will be looking for more information on the timing and duration of the reduction from the next FOMC meeting. On the other hand, markets are also expected to continue to debate growth prospects amid the ongoing global disruptions due to the Delta variant and developments surrounding the Evergrande risk in China. Safe-haven flows should benefit USD and JPY crosses as markets wait for the next Fed meeting and weigh on the AUD.

A new tone of risk aversion gripped the market last week. China’s disappointing retail sales and declining industrial production have raised concerns about slowing economic growth, while strong retail sales in the US have bolstered the outlook for an anticipated Fed cut. . Coupled with concrete data, the Evergrande story has started to gain traction in the forex space. More information on that here in an article published just before Asia opened on Monday: Evergrande: Risk tone for APAC, a win-win scenario in USD, bad for the AUD

Evergrande weighs heavily on the markets

Investors are concerned about the potential impact on the wider economy and have abandoned Chinese real estate stocks overnight, seeking refuge in safe-haven assets. Regulators have warned that its $ 305 billion in liabilities could trigger greater risks for China’s financial system if its debts are not stabilized.

As a result, global equity markets slipped and the US dollar strengthened as investors worried about the risk of a spillover into the global economy. US stocks were down sharply, with the S&P 500 down nearly 2% and on the verge of its largest single-day percentage decline in more than four months.

Evergrande executives are scrambling to save their business prospects, but the default scenario is balanced between bad and worse results. At worst, we can expect a disorderly collapse, a managed collapse, or the less likely prospect of a bailout by Beijing as the best case scenario for financial markets. In this regard, the markets are keeping a watchful eye on the due date of an interest payment of $ 83.5 million on one of its bonds which is due Thursday. In total, the company has liabilities of $ 305 billion.

Implications for AUD / USD

As explained in Evergrande: Risk tone for APAC, a win-win scenario in USD, bad for the AUD, the AUD could be hit the hardest in a worst-case scenario.

The problem is not isolated in Evergrande. The entire Chinese real estate industry has been collapsing for a long time and there are a number of heavyweight companies that are in distress according to the following picture:

This image represents more than half a trillion dollars in total liabilities among 10 Chinese developers which include not only debt but payments to vendors, employees and remaining construction costs. In short, the Chinese real estate development ecosystem is on the verge of collapse.

China is Australia’s largest trading partner. Australia depends on iron ore exports to China. Any significant reduction in Chinese demand would have important ramifications for Australia’s economic revenues from iron ore mining and for the federal budget. (Every US $ 10 the price of iron ore goes down, nominal GDP declines by $ 6.5 billion, and budget coffers are emptied by $ 1.3 billion, that is, according to budget federal 2021-2022).

Meanwhile, the price of iron ore is already falling, which is negative for the AUD. Iron ore prices have fallen as pressure has intensified in China to reduce steel production in order to reduce carbon emissions. Growing risks of a substantial real estate slowdown following the Evergrande crisis contributed to bearish sentiment, ” ANZ Bank analysts explained.

Positioning for weighing in place

Looking at the latest positioning data released last Friday, net AUD shorts have increased and are at their highest levels since our records began. This is due to the price of iron ore dropping like a rock, as well as lockdowns that have raised concerns about the economic outlook. With the implications of Evergrande, the Reserve Bank of Australia will have even more to contend with for a long time to come. Futures market sentiment should weigh on the spot price in the days and weeks to come.

AUD / USD technical analysis

Technically, the prize is offered in anterior lows which act as a support structure. Normally we would expect a correction at this point to test at least the 23.6% or 38.2% Fibonacci ratios before the next downward step. A downward movement would target mid-August lows at 0.7105. However, if sentiment does deteriorate, a large move in risk aversion leading to disorderly gyrations in financial markets should weigh heavily on surrogate currencies such as the Aussie.


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