AUD/USD bulls move in, but the bears are lurking amid global economic woes

• AUD/USD is back to flat on the day following a risk-off-led drop at the start of the week. 
• The bears are lurking with the Jackson Hole around the corner amid Chinese economic woes. 

AUD/USD bulls are attempting to stabilise the pair following a test of daily lows at the start of the week. The price dropped from a high of 0.6929 to a low of 0.6862 following a fresh fall in the yuan that has seen the US dollar rise and weigh on commodities. 

China on the brink

Despite the Chinese best efforts, markets are alarmed by the implications for world growth as the second largest economy and Australia's biggest trade partner struggles with a resurgence of COVID-19 lockdowns and the property crisis. After a monthly meeting, the PBOC lowered the one-year loan prime rate by 5 basis points to 3.65% from 3.7%, while the five-year rate was cut by 15 basis points to 4.3% from 4.45%, reducing the cost of payments on existing loans. However, the news that policymakers have trimmed lending rates was taken as only a minor positive due to the deepening troubles in the economy. 

China's economy narrowly avoided a contraction in the second quarter with an expansion of just 0.4% as virus lockdowns weighed on industrial and consumer spending. Nevertheless, despite the economic damage inflicted by its strict virus policies, President Xi Jinping's signature strategy remains in play even as much of the world drops restrictions.

Another slide in the yuan to its lowest since late 2020 at 6.8520 added to the pressure on the Aussie, reflecting China's position as the largest buyer of Australian resources. The property crisis, which accounts for about a quarter of gross domestic product, is also under pressure, hitting Australia's iron ore export market. 

US dollar rises over global economic woes

Overall, global risk aversion combined with the slide in the yuan has overshadowed domestic considerations and the Aussie's higher beta relationship to the stock market has seen the currency on a knife's edge as traders look ahead to risks this week in the Jackson Hole. The hawkish expectations from a speech by the Fed chairman, Jerome Powell, have put a bid on the greenback and are weighing on risk appetite sending the Dow Jones Industrial Average lower1.82% to 33,085, with the S&P 500 also down over 2%. 

The US two-year Treasury yield has risen by 3% to 3.346% while the 10-year yield climbed 1.68% to 3.04%, implying the yield curve between the two maturities remains inverted, a bearish signal if sustained. This is fuelling a bid on the greenback. Against a basket of currencies, the US dollar was 0.85% higher at 109.09 DXY, not far from the two-decade high of 109.29 touched in mid-July.