AUD/USD, copper dragged lower with sentiment, higher US dollar

It has been a turbulent 24 hours for markets with Wall Street indices extending losses, USD rebounding back above its 200-day MA, copper plunging to a 3-month low and the VIX hitting a 3-month high. And there are a mixture of drivers behind the moves.

The uncertainty over Biden’s stance to run, who could replace him and the increasing likelihood that we’re in for Trump round two is making its mark on sentiment. And whilst there were not high hopes of Beijing unveiling strong reforms at their Third Plenum, they managed to disappoint low expectations.

Keeping in mind that retail sales and growth figures fell short of the mark ahead of the big event, the lack of specific reforms being announced weighed heavily on copper prices, seeing futures fall nearly 3% during the worst day in five weeks.

Copper and AUD/USD track sentiment lower

Copper futures have fallen -18% since the YTD high set in May. The decline is currently within its third leg lower, and bearish momentum has accelerated to suggest further losses may await. However, Tuesday’s low found support around the 61.8% Fibonacci level, high-volume node (HVN) and held above the 200-day EMA. The daily RSI (2) is also oversold to suggest a little mean reversion higher could be on the cards over the near term.

Despite the potential for a bounce, the core view is for copper prices to fall to $4 near the 78.6% Fibonacci level and HVN, which could be confirmed with a break below the 200-day EMA (4.236).

We’d likely need to see sentiment improve overall before assuming a decent recovery for copper prices, but it is something for bears to at least consider around these levels as they may prefer to sell into strength. And with AUD/USD sharing a strong correlation with copper prices on the 1-hour chart this past week, lower copper likely points to a weaker Aussie over the near term.

AUD/USD technical analysis

If copper prices fall further under the current regime, then in all likelihood AUD/USD will also. However, AUD/USD is hugging 67c ahead of China’s open, so perhaps there is the potential for a bounce here to (assuming copper prices can).

0.6689 is a key level for bulls to defend, as a break beneath it assumes a retest of the 50-day EMA at 0.6668. We should keep in mind that AUD/USD has not seen a daily close beneath the 50-day EMA since June 7, and even that marked a swing low. Therefore, we may need to see prices break below 0.6650 to assume a much deeper pullback. And that assumes Wall Street indices have extended their losses and copper prices are indeed headed for $4.

And with Trump, potential trade wars and a Democratic Party in disarray, it is not an impossible scenario.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge