AUD/USD looks primed to capitalize on thawing trade war rhetoric

The Australian dollar has been suffering heavily in recent weeks, as the threat of a global trade war draws traders away from the heavily export-focused Australian investment case. The imposition of steel and aluminium tariffs by the US has seen commodity prices tumble, with the value of iron ore dropping sharply throughout March. President Donald Trump’s decision to target commodity trade will no doubt have raised a significant degree of doubt for AUD traders.

However, with the trade war standoff seemingly freezing, we are seeing investors flock back into risk assets, as seen when the Dow Jones rose 664 points on Monday. With Trump declaring that he is in talks with a number of countries over a potential improvement to the current trade deals, there is a high chance that this standoff will actually lead to greater access for US companies in China rather than a breakdown in trade. Should these positive tones transform into a wider pullback from the recent combative approach, this should provide a significant boost for the Australian dollar.

Looking at the chart, we have seen AUD/USD fall into a crucial support zone, between the 70% retracement and the 76.4% Fibonacci (0.7651-0.7691). The past two retracements have seen the pair fall into this zone, and with trendline support also coming into play, there is a strong chance we will see the bulls start coming into prominence. The pair has exhibited higher lows since the lows of early 2016, and unless we break below 0.7501, there is a strong chance we will see the price turn higher soon enough. Turning to the stochastic oscillator, we have seen the cross of the stochastic and signal lines provide reliable buying opportunities when around the oversold 20 mark. Alternately, utilising the moment when the stochastic line passes through the 20 mark from below as a buy signal, has also proven profitable in the past.

One worry comes from the inability to rally through the 0.8125 resistance level when the price was on the rise in late January. However, with the price having dropped into a crucial support zone and the stochastic falling into an oversold position, there is a strong chance that we will see a bullish reversal come into play. This would be supported in particular in the case that the US moves away from the brink when it comes to a possible global trade war.