The Australian Dollar Holds Own as Confidence Rebounds but is Vulnerable

- AUD declines arrested by NAB confidence rebound for June.
- After U.S.-China tensions, California lockdown stoke unease.
- Corporate earnings, economic outlook now in focus for AUD.

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The Australian Dollar was holding its own against the greenback and Pound Tuesday after a NAB survey revealed o a sharp recovery in business confidence during June but with earnings season afoot and geopolitical tensions returning, some analysts say the antipodean unit is vulnerable to a correction. 

June's NAB Business Confidence index rose from -20 to +1, National Australia Bank said Tuesday, arresting an overnight decline in the Aussie Dollar that had been encouraged when fresh coronavirus related restrictions were imposed in Liverpool and Campbelltown areas of Sydney. 

The NAB survey was carried out between June 24 and 30 so before parts of  Victoria and New South Wales returned to lockdown in July amid fresh coronavirus outbreaks. Australia recorded more than a hundred new infections for all but three days in July, taking its total above 10,000 this week.

“AUD/USD regained some of yesterday’s losses to 0.6950. Australian business conditions increased sharply in June.  The services sector continues to experience weak conditions.  The weekly payrolls report indicate around 35% of lost jobs have been regained, but momentum may be reversing,” says Joseph Capurso, a strategist at Commonwealth Bank of Australia

Above: AUD/USD rate shown at 15-minute intervals with S&P 500 futures (orange line).

Australia’s Dollar had been on the back foot alongside Asian stock markets and currencies after Secretary of State Mike Pompeo set out a formal U.S. rejection of several Chinese territorial claims in the South China Sea late Monday.

This, and a Reuters report showing the White House turning its attention to Chinese companies listed on American markets, further spoiling an already souring mood among investors, aggravated declines for risk assets that first faltered when California announced new ‘lockdown’ restrictions to counter its own fresh rise in new infections.

"China’s exports and imports beat consensus expectation, with both posting gains in June," says Ho Woei Chen CFA, an economist at UOB. "The stronger rebound in imports resulted in the narrowing of China’s trade surplus to US$46.42 billion from US$62.93 in May."

Increasingly frosty relations between the U.S. and China could remain a drag on sentiment but the antipodean currency’s fortune will also be determined in the coming session by the outcome for U.S. stock markets as they respond to corporate earnings including for Citigroup.

Some analysts say earnings season leaves the Aussie vulnerable given it's followed stock markets and other proxies for risk appetite since late April.

“The worry now is a repeat of the sharp pullback seen on 11 June i.e. S&P retreating from the top to the floor of its 3000-3200 range. If so, AUD could correct lower within its 0.68-0.70 range against the USD. To extend its downside, AUDUSD will need to take out 0.6920, the support level that held on 7 and 10 July,” says Philip Wee, an FX strategist at DBS Group Research.

Above: AUD/USD rate shown at daily intervals with S&P 500 futures (orange line).

“AUD has been drawing support from the CNY. This, however, has been watered down by the worsening relations between Canberra and Beijing and offset by a further retreat in other commodity currencies,” Wee says.

The Australian Dollar has recovered all of its earlier 2020 loss since plumbing post-financial crisis lows in March, aided by an optimistic turn in sentiment among investors that’s so-far endured rising tensions between the U.S. and China as well as a still growing global pandemic.

But it’s been roadblocked since early June as the stock markets it followed higher have consolidated, and the danger now is that the second quarter earnings season encourages profit-taking that leads to a correction in the Aussie. 

"Going forward, keep close watch on the US earnings season, as we continue to expect the FX space to take cues from equities, especially for the cyclicals like AUD and NZD," says Terence Wu, a strategist at OCBC Bank.

Above: AUD/USD rate shown at daily intervals with CNH/USD rate (orange line).

“AUD/USD remains neutral to positive. The cross remains in consolidation mode while above support offered by .6778/74, the February high and mid-June low. The .7031/62 resistance area, which consists of the December and June highs, remains in sight. This may cap again but it should be noted that a rise above it would introduce a target of .7284, the 55 month moving average,” says Axel Rudolph, a senior technical analyst at Commerzbank

The antipodean is also at risk from weakness in China's Yuan given Australia's export dependence on the world's second largest economy. A possible turn in investor sentiment toward Australia itself could also become a burden if more of the economy ends up back under lockdown. New lockdowns in Victoria and New South Wales, Australia's two most populous states, are dragging on the country's third quarter economic rebound. 

Investors recently cut bets against the Aussie to their lowest for more than a year, Chicago Futures Trading Commission data shows, but ‘short’ sellers could return if the country’s coronavirus problem grows larger or the global economic recovery is seen to become endangered. 

"California contributes nearly 15% of the US GDP. The fact that it is re-entering a lockdown, in and of itself, would weigh down on the hopes for H2 recovery of the US (and global) economy. While other hotspots of Florida and Texas – which together account for 14% of US GDP – are resisting massive lockdowns so far, further virus upticks there may force their hands," says Wellian Wiranto, an economist at OCBC Bank. 


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