- A combination of factors dragged AUD/USD to over a two-week low on Tuesday.
- Retreating commodity prices, the COVID-19 outbreak in China weighed on the aussie.
- The Fed-RBA policy divergence further contributed to the intraday selling pressure.
The AUD/USD pair witnessed heavy follow-through selling for the second straight day on Monday and extended its retracement slide from the vicinity of mid-0.74000s, or a nearly five-month high. The Australian dollar was pressured by the recent sharp pullback in commodity prices, led by hopes for a diplomatic solution to end the war in Ukraine. Apart from this, the latest COVID-19 outbreak in China further undermined the China-proxy aussie amid the underlying caution tone in the markets.
Despite signs of progress in peace talks, investors remain worried about a further escalation in the Russia-Ukraine conflict. In fact, Russia attacked a large Ukrainian base near the border with NATO member Poland on Sunday. Adding to this, a Kremlin spokesperson said on Monday that all the plans of Russia in Ukraine will be fulfilled in full and in the time frames outlined. This acted as a tailwind for the safe-haven US dollar and further drove flows away from the perceived riskier aussie.
The greenback was further underpinned by a sharp rally in the US Treasury bond yields, bolstered by expectations for an imminent start of the policy tightening cycle by the Fed. The markets seem convinced that the worsening situation in Ukraine might do little to hold back the US central bank from hiking its target funds rate to rein in inflationary expectations. This, in turn, pushed the yield on the benchmark 10-year US government bond to its highest level since June 2019.
Conversely, the Reserve Bank of Australia stuck to its dovish stance and reiterated that it will not raise interest rate until actual inflation is sustainably within the 2%-3% target band. The minutes of the RBA March meeting released earlier this Tuesday revealed that the central bank is prepared to be patient despite the fact that inflation has picked up more quickly than expected. This was seen as another factor that contributed to the pair’s slide to a fresh two-week low during the Asian session.
That said, upbeat Chinese macro releases extended some support to the major and helped limit deeper losses, at least for the time being. Investors also seemed reluctant to place aggressive bets and might prefer to wait for the outcome of a two-day FOMC policy meeting on Wednesday. In the meantime, fresh developments surrounding the Russia-Ukrainesaga will influence the broader market risk sentiment and drive the USD demand, providing some impetus to the pair. Traders will further take cues from the release of the US Producer Price Index and the Empire State Manufacturing Index.
From a technical perspective, the pair, for now, has managed to defend an upward sloping trend-line support extending from the YTD low touched in January. This makes it prudent to wait for sustained weakness below the daily swing low, around the 0.7165 region, before positioning for any further decline. The pair might then turn vulnerable to test the 0.7100 round-figure mark. Some follow-through selling should pave the way for a slide towards testing intermediate support near mid-0.7000s en-route the key 0.7000 psychological mark and the 17-month low, around the 0.6965 region.
On the flip side, any recovery attempt back above the 0.7200 mark now seems to confront resistance near the 100-day SMA, currently around the 0.7220 region. A further move up is more likely to meet with a fresh supply and remain capped near the 0.7265 area. The latter should act as a pivotal point, which if cleared decisively will negate any near-term bearish bias and allow the pair to aim back to reclaim the 0.7300 round-figure mark. The said handle coincides with a technically significant 200-day SMA, above which the momentum could get extended towards the next relevant resistance near the 0.7365-0.7370 zone.