The Australian Dollar is Today's Worst Performing Major Currency, and Turkey is to Blame

- AUD/USD crushed beneath sheer weight of negative news-flow. 

- Geopolitics, deteriorating technical picture a noxious cocktail for AUD.

- Turkey, Russia, China woes bite as AUD/USD techs flag further losses.

© moonrise, Adobe Stock

The Australian Dollar fell sharply Friday as the Turkish currency crisis worsened in the wake of an escalating dispute between Ankara and Washington, at a time when global markets were already under pressure from mounting geopolitcal tensions between US, China and Russia.

European Central Bank officials are reportedly growing concerned about the exposure of the continent's banking sector to Turkey. Turkey's Lira has been clobbered in currency markets, falling by 56% against the US Dollar this year.

These elevated tensions are bad news for growth prospects, commodity markets and risk appetites the world over, which means they are also bad news for the Australian Dollar.

The currency is underwritten by Australia's mammoth commodity exports and also serves as a proxy for financial market risk appetite.

Above: The Aussie Dollar is the worst-performing G10 currency on August 10.

Foreign exchange market moves "suggest a somewhat risk-averse market environment, with the commodity-linked currencies AUD and NZD among the main losers and the safe havens CHF and JPY resisting the greenback’s strength," says Charalambos Pissouros, Senior Market Analyst with JFD Brokers.

The Lira's woes are the result of concerns about spiralling inflation, a politically compromised central bank and now, US sanctions targeting government ministers. Ankara and Washington have locked horns over the detention of US pastor Brunson.

President Trump has spoken out in favour of Brunson, who is being detained over alleged terrorism offences connected with the failed 2016 coup in Turkey, and the US government has imposed sanctions on two Turkish ministers responsible for his incarceration. 

Above: USD/TRY rate at daily intervals. Captures 2018 collapse.

"The speed at which the lira depreciates is accelerating and this was only going to last so long before concerns over contagion mounted. We now have the first signs of this with the EUR/USD rate plunging through key support on fears over the impact of the turmoil in Turkey on the European banking sector," says Derek Halpenny, European head of global markets research at MUFG. "The lack of response from Turkey to the latest bout of turmoil is merely worsening the situation."

Sanctions and Turkish instability come amid a concerted drive by US officials to damage the Russian economy with other sanctions connected to a range of allegations levelled at the Eurasian country. This other escalating dispute comes amid an ongoing "trade war" between the US and China. 

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Australian Dollar Feels the Heat Despite Upbeat RBA

On the back of the rising tensions, the AUD/USD rate was quoted 0.75% lower at 0.7315 during morning trading Friday and the Pound-to-Australian-Dollar rate was up 0.47% at 1.7481.

Price action also comes as traders responded to the latest economic projections from the Reserve Bank of Australia (RBA), which dealt another blow to the interest rate outlook down under. 

In an upbeat monetary policy report, RBA officials continue to project "above trend" economic growth will drive the unemployment rate lower, and wage packets as well as consumer price inflation higher over coming years. 

However, the rub for the currency is that despite this, the projected increase in inflation is still insufficient for markets to boost market expectations of an Australian interest rate rise before late 2019. 

The RBA has held its interest rate at a record low of 1.5% for exactly two years now, citing below-target inflation and a debt laden household sector that it says is ill-equipped to handle the pressures of higher borrowing costs.

"The additional six‑month forecast horizon to include December 2020, showed underlying inflation not lifting from earlier‑published June forecast of 2.25%. Therefore, the RBA are not forecasting inflation as high as the mid‑point of their 2%‑3% inflation target over their published forecast horizon," says Richard Grace, chief currency strategist at Commonwealth Bank of Australia. 

Changes in interest rates, or hints of them being in the cards, are only made in response to movements in inflation but impact currencies because of the push and pull influence they have on international capital flows and their allure for short-term speculators.

This is after AUD/USD failed to breakout from its range Thursday, despite being tantalising close, leaving it locked in a triangle pattern that has been forming since the pair started trending sideways in June.

Above: AUD/USD rate shown at daily intervals. Includes triangle pattern.

The breakout failure and subsequent pivoting strongly suggests the bears are still in control, despite a positive tone for the Australian Dollar through much of the week.

Robust Chinese trade data out Wednesday helped ease concerns that President Donald Trump's "trade war" would dent the Chinese economic, leading to a global slowdown and fall in commodity prices, which are Australia's 'bread and butter'.

The triangle pattern now looks complete (or almost complete) after forming five waves, labelled a-e on the chart below. Triangles must have a minimum of five waves but, on rare occasions, can contain up to nine.

Once the pattern completes there is normally a breakout in either direction, with the exchange rate moving the same distance as the height of the triangle at his tallest point higher or lower. For a more conservative target a ratio of 61.8% of the height is used to locate the target; 0.618 is the 'golden ratio'.

The pair has been in a pretty established downtrend ever since the beginning of the year and this marginally favours the triangle eventually breaking lower. A move below the b-wave lows of 0.7318 would probably provide confirmation of a breakdown to a target at 0.7225.

Above: AUD/USD rate shown at daily intervals. Includes triangle and downside target.

A bearish break lower would also make more sense in light of the pair's longer-term fundamentals. The recent RBA meeting on Tuesday August 7, reinforced a negative outlook for interest rates as RBA governor Lowe suggested rates might not rise until 2020.  

This contrasts with the US central bank, the Federal Reserve (Fed), which is expected to raise interest rates at a pace of 0.25% every quarter for the rest of 2018 and 2019. The Fed has already raised rates twice this year alone, so the Fed Funds now sits at 2%. It is widely expected to raise them again in September.

A major driver of exchange rates is relative interest rate differentials, with the currency from the jurisdiction with the higher rates outperforming because capital tends to flow to where it can earn the most interest.

Given the aggressive hiking regime envisaged in the US compared to Australia, this vastly favours the USD side of the AUD/USD pair, and, therefore, also suggests further downside for the pair. This is in line with the bearish technical picture outlined above.

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