AUD/USD: An Expression of EM, China Trade Woes

The Australian Dollar remains one of the most vulnerable currencies as a proxy to EM and China. With the latter about to face additional tariffs by the US (it may happen anytime), the vulnerability of the aussie, notwithstanding the positive Q2 GDP (backward looking), it's a function of the dominant risk sentiment dynamics.

In the chart, one can observe our prop risk weighted index making new trend lows, and that's what driving the oceanic currency lower for now, dispelling the more constructive stance by other correlated assets such as the offshore yuan, gold, dxy (orange, red, green) which argue for buying interest off the lows decent value opportunities. The sudden decline in the Australian vs US yield spread a few hours ago didn't help (blue line).

In terms of price action, the fragility in the aussie can be interpreted via the behaviour in prices, with the most recent sequences of selling pressure in Sept being impulsive in nature, while the recoveries in the rate are much soggier and slow, which translates in a market where the imbalances of supply are much more accentuated. If the rate breaks sub 7160, a nearby support line at 7150 awaits, with a break lower to most likely exacerbate the pain in the aussie.

Be mindful of being committed on trades ahead of the US NFP, where we've noted that any positive data towards the USD may be faded if this week's price action and the theme is any indication. The weakness in the USD this week, despite the highest US ISM in 14y, is a clue. In other airs such as EU, UJ, we suggest that a possible fade of a positive headline number may be in store, with the conviction on seeing the same action in the aussie at lower levels, given the negative sentiment around EM and China vs US trade war woes.