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AUD/USD: What are the bulls waiting for? 0.74 on the cards - Not so fast ...

  • AUD/USD has been riding the dollar weakness at the start of this year.
  • The optimism of some for a resolution on US/China trade dispute underpins AUD.

While there is a bullish case for the pair, AUD/USD has fallen into a consolidation around the pivot between S1 and R1. There appears to be a neutral bias at this juncture with the candle's grouping which can be a sign of a reversal, and when marrying that up with the DXY's bullish correction, a break of the 96 handle there could be the tipping point for a downside correction.

Fundamentals are stacking up for a bullish bias

However, the fundamentals are stacking up for a bullish case. The market is fixated on Sino/US trade relations, and the optimism of some for a resolution on the trade dispute underpins prospects for a higher Aussie. The currency has been a proxy for the trade war and worries about a Chinese and global economic downturn and therefore, pending more news on the U.S.-China talks, and with equities buoyant, any downside in price action is likely to be an excellent buying opportunity. 

The Dow Jones reported on the matter, following talks that took place between officials from both Washington and Beijing assigned to the task, said that both sides are not ready to conclude a deal, but cabinet-level follow-up talks are expected later in January. They say negotiators have narrowed differences on trade, citing sources. A separate report confirms that negotiations will continue on Wednesday. That should all be taken as good news and Aussie bullish. 

At the same time, global growth concerns have scaled back following Friday's strong U.S. jobs report and indications of a more flexible and accommodative approach from the Fed and PBOC underpin sentiment shifting positive. AUD/JPY could also be a significant contributor to a sustained rally in AUD/USD considering its play on risk qualities which should attract a bid as the yen unwinds in accordance to rising risk apatite and stocks prices. 

On the flipside

On the other hand, last week's flash crash proved the fragility of optimism in the market and Apple's surprise negative call on general market conditions should be a warning to bulls; It likely means that there are plenty more speed bumps along the way and downgrades from corporate sentiments to follow. Trade talks are unlikely to conclude quickly, and it will not be long until we are reminded of the weakness again in the global growth picture. 

Ears over the BoC

Tomorrow's BoC could be the catalyst for the week, and it will not be surprising if we get a cautionary approach from Poloz who will perhaps offer modest downward revisions to 2019 growth. It is highly unlikely that either the BoC or RBA are about to start projecting rate hikes at a time when markets are, rightly or wrongly, starting to position for the Fed to cut rates. Moreover, until Powell spoke last Friday, the message from the Fed has not been as dovish as severely battered stocks had been hoping for, and a March hike could still be on the cards - A build up to that could put the dollar back in the driver's seat. 

AUD/USD levels

Bulls can look to the 0.74 handle (Dec high 0.7394) and a break of the 200-D SMA located currently at 0.7337 - (0.7190 needs to give). However, in getting there, the pair likely needs to offer a discount at this juncture to attract another wave of bullish appetite. S3 is located at 0.7080. A close below 0.7117 would likely attract offers to test 0.71 the figure. Below S3, 0.7020 falls in around the support line of late Dec business guarding territory down towards the flash crash lows and the lowest levels that have been seen in ten years. 

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