AUD/USD recovers further from YTD low, retakes 0.6400 mark and beyond on softer USD

• AUD/USD gains positive traction on Friday and snaps an eight-day losing streak to the YTD low.
• Hope for more stimulus from China prompts intraday short-covering amid a mildly weaker USD.
• The Fed's hawkish outlook and looming recession risks limit the USD losses and cap the major.

The AUD/USD pair builds on the overnight bounce from the 0.6365 area, or its lowest level since November 2022 and gains some positive traction during the Asian session on Friday. Spot prices climb further beyond the 0.6400 mark in the last hour and for now, seem to have snapped an eight-day losing streak, though any meaningful appreciating move still seems elusive.

Fears over China's debt-laden property sector intensified after Evergrande – the country's second-large realtor – and a related company – Tianji Holdings – filed for protection from creditors in a US bankruptcy court on Thursday. This adds to concerns about the worsening economic conditions in China and fuels speculations about additional stimulus measures, which, in turn, drives some flows towards the China-proxy Australian Dollar (AUD). The US Dollar (USD), on the other hand, is seen consolidating just below its highest level since July 12 touched on Thursday and turns out to be another factor lending some support to the AUD/USD pair'.

The USD downtick, meanwhile, could be solely attributed to a modest pullback in the US Treasury bond yields from a multi-year peak. It is worth recalling that the yield on the benchmark 10-year US government bond shot back closer to its highest level since 2008 touched in October 2022 in the wake of growing acceptance that the Federal Reserve (Fed) will keep interest rates higher for longer. The expectations were reaffirmed by the July 25-26 FOMC meeting minutes, which revealed that policymakers continued to prioritize the battle against inflation. This should act as a tailwind for the US bond yields and the USD, eventually capping the AUD/USD pair.

Traders might also refrain from placing aggressive bullish bets around the Aussie in the wake of rising bets for another on-hold rate decision by the Reserve Bank of Australia (RBA) in September, bolstered by the disappointing domestic jobs data on Thursday. In fact, the Australian Bureau of Statistics (ABS) reported that the economy lost a net 14,600 jobs and the Unemployment Rate unexpectedly rose to 3.7% in July. Hence, it will be prudent to wait for strong follow-through buying before confirming that the AUD/USD pair has formed a near-term bottom and positioning for any further recovery in the absence of any relevant economic data from the US.

Technical levels to watch