As expected, the AUD/USD pair reached the level of 0.77 and is currently trying to consolidate in this price area. It was almost guaranteed to reach it after the impulse breakdown of the level of 0.7605 (Tenkan-sen line on the daily chart). However, there is also a downside to this event: the higher the AUD/USD buyers rise, the higher the risk of a massive corrective pullback becomes. At the moment, the bulls of the pair hardly win every point, following the principle of "one step forward, two back". In this case, the situation will only get worse as soon as traders reach the 0.7800 mark.
It should be noted that the AUD/USD pair is currently at multi-month highs: the last time the Australian dollar was at such levels was in March 2018. Prior to it, the Australian dollar reached three-year highs at the beginning of 2018 (January-February), settling in the price area of 0.81. However, buyers failed to stay at these price heights. The AUD began to gradually, but steadily decline after reaching the level of 0.8137 and so, almost every candlestick on the monthly chart was bearish over a year. As a result, the Australian dropped to the area of the strong support level of 0.7000, and traded in the range of 0.68-0.71 for a year and a half until the coronavirus crisis. Over the past 7 years, the pair has hardly stayed above the 0.80 mark for more than a few weeks, although it was much higher (in the range of 0.95-1.10) between 2009-2014, which is after the end of the global economic crisis and before the era of the dollar's recovery when the US Fed began to actively raise interest rates.
This background suggests that we are approaching an extreme, from where a large-scale correction is possible. There are less than three hundred points left to the key level (80th figure), after the pair has risen more than 700 points over the past two months (from the beginning of November). In addition, as soon as the pair reaches the price level of 0.78-0.80, it will surely attract the attention of members of the Reserve Bank of Australia. Considering the past time periods, it can be noted that the RBA members regularly criticized the overvalued rate of the national currency. Therefore, it is likely that Philip Lowe will focus on this aspect during the next meeting of the regulator, which will take place next month.
Besides the risk of verbal intervention, there are other factors for the AUD/USD dynamics. First of all, we are talking about China, which still have tension with Australia. Canberra continues to insist on a global investigation into the origin of the coronavirus and on measures taken at an early stage (that is, when it was still within the borders of Wuhan) to combat it. In addition, Australia remains one of the most vocal critics of the Chinese authorities' policy towards the Uyghurs. Here, it should be noted that the relations between the countries began to get cold in 2018, when Canberra banned the use of Chinese Huawei products for the construction of 5G networks in the country.
China did not remain in debt. At the end of last year, it imposed restrictions on imports of Australian coal (the official reason is that Australian coal does not meet Chinese environmental standards). Before that, Beijing significantly increased customs duties on Australian wines, and also restricted the supply of two leading Australian suppliers of lamb. At the same time, Chinese customs authorities have suspended part of the Australian supply of beef and barley, saying that they do not meet the sanitary standards of the People's Republic of China.
So far, the Australian dollar has been relatively calm about the Australian-Chinese conflict. During periods of escalation, the indicated currency shows a corrective price decline, while the upward trend remains. In my opinion, the situation can seriously change any moment if China focus its attention to iron ore. This is mostly the only strategically important commodity for Australia that has not been affected by interstate issue.
China is the largest importer of ore – almost 70% of the world's ore imports, totaling almost $ 100 billion, went to China during 2018. In turn, Australia is the largest supplier of ore to China – more than 65% of all ore imported into the country came from ports on the Green Continent. Given the above figures, it can be assumed that as soon as Beijing starts talking about any restrictions on this commodity, the Australian dollar will collapse to several figures. At the moment, iron ore is not yet involved, while the China-Australia conflict still persists and is gradually gaining momentum. Therefore, Beijing is very likely to use this leverage, at least in the context of verbal pressure. Simply put, it will scare Australia's restrictive measures on its iron ore.
In this case, the AUD/USD pair retains its upside potential to 0.7800 in the medium-term. However, it is suggested to close long positions in this price area, as AUD/USD buyers may face certain difficulties in reaching the level of 0.7800. These difficulties will be both due to the Chinese factor and the RBA's position, whose members will begin to exert verbal pressure on the Australian dollar.
The technical side of the issue is consistent with the fundamental one. On D1, W1 and M1, the AUD/USD pair is on the upper line of the Bollinger Bands indicator. On the daily and weekly charts, the Ichimoku indicator has formed a bullish "Parade Line" signal. On the monthly chart, the nearest resistance level is located at 0.7800 - upper limit of the Kumo cloud.
