AUD/USD bears looking to break 0.7220, bulls eye a test of 4-hour 61.8% golden ratio

AUD/USD ended Friday under pressure as the US dollar strengthened on both the Evergrande risks and as markets contemplate Federal Reserve tightening. AUD/USD closed the New York session at 0.7256 and had travelled from a high of 0.7316 to a low of 0.7236. 

The DXY index, a measure of the US dollar vs a basket of currencies, was poised for its third straight week of gains as the uncertainty over beleaguered Chinese property developer Evergrande helped the greenback bounce back from a sharp decline in the prior session.

Evergrande debacle a major risk to AUD

China Evergrande Group owes $305 billion and has run short on cash, missing a Thursday deadline for paying $83.5 million. However, the company has a 30-day grace period but the question is whether it will make the payments before the deadline. A collapse of the company could create systemic risks to China's financial system which has negative ramifications for global markets.

The safe-haven dollar had its biggest one-day percentage drop in about a month on Thursday after Beijing injected new cash into the financial system and Evergrande announced it would make interest payments on an onshore bond, boosting risk sentiment.

While Wall Street's bellwether, the S&P 500, posted a slim gain on Friday, major European markets slumped as investors weighed a potential fallout from debt-laden China Evergrande.  Additionally, MSCI's gauge of stocks across the globe shed 0.15% after three days of gains, leaving the index little changed for the week.

The Evergrande debt resolution is far from clear which is an overhang of immense risk for Australia's iron-ore market and ultimately, the Australian dollar. Positioning in the currency is already very negative, but a short squeeze is not insight given both domestic and downside risks continue to pile up. 

Australia is the most China-dependent country in G10 and has already lost about $6.6 billion in revenue to the Chinese market between July 2020 and February 2021. This came as a direct consequence of Beijing targeting its exports with heavy tariffs, claiming they were part of ‘anti-dumping measures. Another hit to the iron ore market could be the straw that broke the camel's back with respect to the Aussie. 

Incidentally, the Reserve Bank of Australia has officially “frozen” its policy until February 2022. Therefore, data in the next few weeks may have a somewhat more limited impact on the currency and the focus will remain off-shore for the week ahead. August Retail Sales will be eyed, however. 

AUD/USD technical analysis

As per the prior analysis, AUD/USD Price Analysis: Daily golden 61.8% ratio under pressure, where the ratio was flagged as potential resistance, the price has indeed stalled and reversed, en-route to prior lows. 

AUD/USD prior analysis, daily chart

Live pre-market open update

As illustrated, the price has dropped and is currently en route for a downside extension. Failures below 0.7220 open risk of a retest of the mid-Aug lows and 0.71 the figure. 

On the other hand, the bulls will be in control on a break of the 4-hour 20 and 50 EMAs that guard a run to the 200-EMA near 0.73 the figure. 

Additionally, the M-formation is a bullish reversion pattern which could see a test of the neckline that has a confluence with the golden 61.8% Fibonacci retracement ratio, (bullish above, bearish below). 

Bearish trade setup

Meanwhile, however, on the lower time frames, there is a compelling prospect as follows which offers a 1:2 risk to reward high probability day-trade set up for the open:

AUD/USD 1-hour chart

The 1-hour chart is bearish while below the 200 EMA and as the price corrects to the 61.8% ratio and meets a confluence of resistance, including the 20 EMA. This could be last that we see from the bulls in the meantime. 

AUD/USD 10-min chart

Therefore, bears will be marketing up their entries on lower time frames (e.g. the 10-min chart is appropriate) to target the prior 0.7220 supporting area. A sell order around the break of 0.7250 with a stop loss placed above the recent highs of 0.7268 to target the 0.7220's offers > 1:2 R/R.