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Summary: Due to concerns about potential deflation in China and hawkish comments from Fed policymakers, the AUDUSD continues to face pressure during Friday's Asian and European sessions. Despite the ongoing sluggishness in the Chinese economy, the exchange rate has not reached new lows, indicating that a bottom within the range might have formed.

Fundamentals

The AUDUSD remains under pressure on Friday, currently trading around 0.6525, with a 0.20% cumulative increase for the day.

The recent resilience of the AUDUSD indicates a recent hawkish bias toward the Reserve Bank of Australia (RBA) and hopes for a shift in Fed policy. Meanwhile, new fiscal stimulus measures from the Chinese government and expectations of stimulating economic demand are providing support for the Australian dollar.

Due to weak demand and declining exports, the Chinese economy is grappling with deflation, making fiscal expansion and monetary stimulus seem necessary. It's noteworthy that Australia is a major trading partner for China, and China's new stimulus measures support the Australian dollar.

However, a better-than-expected drop in China's July financial data is dampening market sentiment.

Data released by the People's Bank of China (PBC) on August 11th shows that commercial banks granted the lowest monthly loan amount since 2009, indicating weakened demand in the world's second-largest economy and increasing the risk of long-term deflation.

The PBC stated on Friday that new loans in July were only 345.9 billion yuan, less than half of the market's expected 780 billion yuan. The total financing amount (a broadly defined measure of credit) for the previous month was 528.2 billion yuan, significantly lower than expected.

This disappointing social financing data highlights the fragile state of China's recovery and exacerbates a series of negative impacts recently seen, including economic deflation, sharp export declines, and sluggish manufacturing activity. Most importantly, the real estate market crisis is worsening, raising concerns about major developers defaulting once again.

The dim economic data is increasing pressure on policymakers to intensify monetary and fiscal stimulus. Meanwhile, factors such as high levels of economic debt, a weakened yuan, and financial stability risks are impeding actions by the PBC.

The current focus of the People's Bank of China's actions is on stabilizing the exchange rate, so short-term fiscal policies may not have significant effects. This makes it difficult to foresee signs of credit growth improvement, and the risk of future deflation will persist. This could continue to keep the Australian dollar under pressure or push it lower.

On the Australian front, if upcoming economic data, minutes from the August RBA meeting, and speeches from the incoming new RBA Governor this month suggest a third pause in rate hikes at the September meeting, the AUDUSD could drop below 0.6500 again. After the surprising decision by the RBA last month to keep the cash rate unchanged at 4.10% for the second consecutive month to assess the impact of previous rate hikes, the Australian dollar has been struggling.

Technical Analysis

From a technical perspective, the AUDUSD is trading below the 5-day SMA and maintains a downward slope in the four-hour chart, indicating that the path of least resistance for this currency pair is to the downside. The Relative Strength Index (RSI) also displays signs of weakness within the bearish trend.

However, a rebound following structural price patterns compared to previous lows can present an opportunity not to be missed. This could also be considered a short-term signal of stabilization.

If the bulls decisively break through the resistance around the August 4th high of 0.6609, it will shatter a series of lower highs and lower lows. This would propel the asset toward the June 29th high of 0.6640, followed by the psychological resistance at 0.6700.

On the flip side, a renewed drop below the psychological level of 0.6500 would expose the asset to the risk of sliding toward the May low of around 0.6458. A breach of the latter would add momentum to the asset's journey toward a new monthly low of 0.6414. Overcoming these levels would pose significant resistance for any bullish attempts to regain momentum.

Overall, in terms of structural trading opportunities, the current path of least resistance is to the upside. In terms of trading, buying the dips should be the primary strategy.

Trading Recommendations

Trading Direction: Long

Entry Price: 0.6520

Target Price: 0.6777

Stop Loss: 0.6450

Valid Until: 2023-08-25 23:55:00

Support: 0.6509, 0.6486, 0.6458

Resistance: 0.6572, 0.6609, 0.6632