Aussie extends losses on China concerns

The Australian dollar has edged lower in the Wednesday session. AUD/USD is currently trading at 0.7358, down 0.27% on the day.

The Westpac Consumer Sentiment Index rose in November to 105.3, up slightly from 104.6 in October. Consumers remain positive about the economy, and the success of the vaccination programme and the reopenings in Sydney and Melbourne have boosted consumer confidence.

We continue to see a disparity between market expectations of a rate hike and RBA guidance. The RBA is sticking to its stance that it does not expect economic conditions to be suitable for a hike prior to 2024, while the markets are much more hawkish and have priced in the prospect of several rate hikes in 2022. The central bank meets next on December 7th and we could see a trim in the bank’s bond purchase scheme (QE), perhaps from the current AUD 4 billion to AUD 3 billion. If the bank is satisfied with the pace of the recovery, QE could be further scaled back early next year and wound up by mid-2022.

When China sneezes, Australia is prone to catch a cold, as the Asian giant is Australia’s largest trading partner. China’s property sector is weighing on risk sentiment, as Chinese property developer Evergrande faces a final deadline today of about USD 148 million in offshore coupon payments. The wall of silence from Chinese authorities as to how they will respond to the Evergrande crisis is only exacerbating investors’ nerves and is weighing on the Australian dollar, as fears of the collapse of the China property sector and the subsequent contagion are very real.

The markets are keeping a close eye on US inflation, which will be released later today. Inflation remains high, but the markets have bought into the Fed’s message that it will not raise rates for some time, and unless CPI comes in above 6%, I would not expect a sharp reaction from investors.

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AUD/USD Technical

The weekly support and resistance levels are as follows:

• There is resistance at 0.7506 and 0.7609
• AUD/USD is putting some pressure on support at 0.7330. Below, there is support at 0.7257

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