Pressure in the Australian dollar to ease
The pressure on the Australian dollar eased after China’s flash PMI in September firmed to 50.5. The downward move in the AUD/USD has been sharper than justified by interest rate differentials between Australia and the US. We suspect this is due to cross buying in EUR/AUD and GBP/AUD. Sentiment in the AUD is also weighed by lower iron ore prices which broke below 80, the lowest level since late 2009. As the AUD/USD is currently trying to break below 0.8874 support convincingly, the options market demand to hedge volatility has surged higher. Indeed a close below 0.8874 will expose downside risk to 0.8730 and this year’s low of 0.8660. Nevertheless, we expect the recent pressure on the AUD to subside as technical indicators imply that prices are in oversold territory. Furthermore, the options market bias to hedge downside risks in the AUD has also eased in the past two weeks. A stabilisation in iron ore prices as the rebalancing in China’s economy firms will also help sentiment in the AUD.