The path of least resistance for the pair is still lower, with the next key target being at 0.7150.
- Sell the AUD/USD and set a take-profit at 0.7150.
- Add a stop-loss at 0.7300.
- Timeline: 1-2 days.
- Set a buy-stop at 0.7250 and a take-profit at 0.7300.
- Add a stop-loss at 0.7200.
The AUD/USD pair retreated to the lowest level since August 27th as the market reflected on the falling commodity prices. The pair fell to a low of 0.7220, which was about 3.40% below the highest level this month.
Commodity Prices Slump
Australia is one of the leading commodity prices in the world. The country is a leading producer of commodities like iron ore, coal, gold, and aluminium. It sells most of these commodities to China. Therefore, most traders tend to view the Australian dollar as a leading proxy for the Chinese economy.
After soaring to record highs, commodity prices have started easing in the past few weeks. The price of iron ore, which is used in the manufacture of steel, has declined by more than 20% in the past week. This drop was mostly because of the limits that the Chinese government has put on steel producers.
These limits have pushed more steel mills to dump their already-processed steel in a bid to reduce their inventories. At the same time, there is a risk of the housing market, which is a leading consumer of steel as Everglande collapses. There is a possibility that many banks will avoid making loans to construction prices as the situation worsens. This, in turn, will affect the strength of the Chinese economy.
The drop of commodity prices has also led to a major sell-off in mining stocks that are essential in the Australian economy.
Looking ahead, the AUD/USD will react to the latest US housing numbers that will come out today. The data is expected to show that housing starts increased from more than 1.534 million in July to more than 1.55 million in August. On the other hand, building permits are expected to decline from more than 1.63 million to more than 1.6 million. These numbers will come a day ahead of the Fed decision.
AUD/USD Technical Analysis
The two-hour chart shows that the AUD/USD pair has been in a deep sell-off in the past few weeks. It has even formed a descending channel and moved below the 61.8% Fibonacci retracement level. The pair has also dropped below the 25-day and 50-day moving averages and the Ichimoku cloud. Therefore, the path of least resistance for the pair is still lower, with the next key target being at 0.7150.