AUD/USD Soars as Stocks, China and Hormuz hopes fuel bullish breakout

AUD/USD trades at fresh multi-year highs after staging breakout
Risk appetite surge and strong earnings continue to support
China PMI data beat forecasts as new orders growth accelerated
Sustained move above .7222 may open the door towards .7283

AUD/USD Rips Higher

AUD/USD is attempting a breakout above .7222 resistance, powered by renewed hopes for a peace deal between Iran and the United States, a solid China services PMI report, along with another surge in equities following blowout earnings from AMD.

While we’ve already seen one failed attempt above the level recently, and the price action this time around is hardly screaming conviction in the early stages, the broader bullish trend, triangle structure the pair had been coiling within over the past week, along with the message from the oscillators suggesting upside momentum is building, all point to the risk of a larger topside move if buyers can finally make it stick. If they can’t, questions will start to be asked.

Source: TradingView

Should the break above .7222 hold, long setups could be considered with a tight stop beneath the level for protection, targeting the June 2022 swing high at .7283. While it’s the less favoured of the setups right now, failure to hold above .7222 could also open the door for shorts beneath the level with a tight stop above, targeting .7200 initially and, beyond that, uptrend support running from the April 1 lows located just above .7150.

Risk Appetite Remains Dominant Driver

It’s not just the technical picture that favours the bulls either. Risk appetite is surging and the correlation matrix reinforces that it remains the dominant force driving the Aussie higher.

Source: TradingView

While short-end rate differentials may still exert some influence on AUD/USD over shorter timeframes, that likely says more about fluctuations in crude oil prices than underlying economic fundamentals. Instead, the persistently strong inverse relationship with implied volatility measures for US equities and bonds, along with the similarly strong positive relationship with equity markets, helps explain why AUD/USD is trading at fresh multi-year highs.

As such, with corporate earnings, broadly, continuing to blow past expectations around the world, developments in the Gulf remain the key swing factor to monitor for broader sentiment risks.

China Link Provides Fresh Tailwinds

Adding tailwinds from a fundamental perspective, China’s Caixin services PMI beat expectations in April, lifting to 52.6 from 52.1 previously against forecasts for 52.0. The composite PMI also strengthened sharply to 53.1, signalling the second-fastest pace of expansion since May last year as activity accelerated across both manufacturing and services.

Importantly, incoming new orders rose for a 40th consecutive month, with firms linking the improvement to stronger domestic market conditions. Given the long-standing relationship between China’s economic performance and the Australian dollar as a liquid proxy for Chinese growth, the report only adds to the broader risk-positive backdrop supporting the Aussie.

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