AUD/USD stays pressured towards 0.6500 as economic woes join fears of China deflation

• AUD/USD fades bounce off two-month low after snapping three-day winning streak with a heavy loss the previous day.
• Mixed Aussie data contrasted with downbeat China trade numbers, Country Garden’s missing payment to lure bears.
• Moody’s, Fitch and Italy offer challenges for majors from three sides and weigh on sentiment, as well as Aussie price.
• China CPI, PPI will be important as fears of deflation, slower economic growth for Australia’s biggest customer intensify.

AUD/USD justifies its risk barometer status by being depressed at the lowest level in two months, fading corrective bounce off the multi-day bottom towards revisiting 0.6540 during the early Asian session on Wednesday. In doing so, the Aussie pair not only takes clues from the market’s risk-off mood but also focuses on the US data and cautious mood ahead of China’s headline inflation release.

The pair dropped heavily the previous day after initially bearing the burden of unimpressive data at home and downbeat China trade numbers, as well as fears surrounding the real estate sector from Beijing. Following that major challenges for the banking sector and pre-data anxiety drowned the quote. However, the day-end consolidation and the news that the US might ease its hardships for China AI firms, per Bloomberg, seemed to have triggered the quote’s rebound.

On Tuesday, Australia’s Westpac Consumer Confidence for August slumped to -0.4% versus 2.7% prior. Alternatively, the National Australia Bank's (NAB) Business Conditions for July edge higher to 10.0 from 9.0 prior and 8.0 market forecasts whereas the NAB Business Confidence came into 2.0% compared to -1.0% market consensus and 0.0% prior.

Further, China’s headline Trade Balance improves in July but the details suggest deteriorating Imports and Exports for the said month, suggesting the economic challenges for the Dragon Nation which already suffers from geopolitical woes. That said, India bans drone makers from using Chinese equipment after stopping the imported laptops and computers previously. Also, Chinese real estate giant Country Garden announced missing two dollar bond coupons due on August 6 totaling $22.5 million per Reuters. The news renews fears of bankruptcy among the realtors in China even if the Country Garden has a 30-day grace period to avoid such hardships.

On the other hand, US Goods and Services Trade Balance for June came in at $-65.5B versus $-65B expected and $-68.3B prior whereas the NFIB Optimism Index for July improved to 91.9, the highest in nine months, from 91.0 previous readings and 90.6 market forecasts. Further, US IBD/TIPP Economic Optimism for August eases to 40.3 from 43.0 market forecasts and 41.3 prior whereas Wholesale Inventories for June dropped to -0.5% versus the analysts’ estimations of reprinting the -0.3% figures.

It should be noted that Philadelphia Federal Reserve Bank President Patrick Harker advocated Fed’s policy pivot while saying, per Reuters, “I believe we may be at the point where we can be patient and hold rates steady and let the monetary policy actions we have taken do their work.” On the other hand, Richmond Fed President Thomas Barkin stated that the Gross Domestic Product (GDP) remained "solid". 

Additionally, concerns about rating giant Moody’s downgrading to nine United States banks joined Fitch Ratings’ downgrading of cutting the credit rating and warning about the outlook of a few US financial institutions renewed banking fears. That said, Italy’s announcements of a surprise windfall tax on bank profits exert downside pressure on the Euro and allow the US Dollar to remain firmer, which in turn weighs on the Gold Price.

With this, the market sentiment roiled and allowed the US Dollar Index (DXY) to jump the most in a week before ending Tuesday’s North American session around 102.55. Due to the same, Wall Street closed in the red with major losses among the bank stocks whereas the US 10-year Treasury bond yields dropped to the weekly low of around 3.98% before bouncing off 4.03% by the day’s end.

Looking ahead, China’s headline inflation data comprising the Consumer Price Index (CPI) and Producer Price Index (PPI) will entertain traders. That said, the CPI is likely to suggest deflation in one of the world’s biggest customers of Australia while posting -0.4% YoY figures versus 0.0% prior whereas the PPI is expected likely to improve to -4.1% YoY from -5.4% prior.

Technical analysis

A nine-month-old rising support line, near 0.6480 at the latest, appears the key level to break for the AUD/USD bears to tighten the grip. Failing to do so can join the nearly oversold RSI to trigger the Aussie pair’s corrective bounce towards the lows marked in late June and early July around 0.6600.