AUD/USD weekly outlook: June 3rd 2024

Q1 figures for Australian GDP are released on Wednesday, and if Q4 figures are anything to go by, it could be a lacklustre affair. If growth continues to soften, it further cements the case for the RBA to not hike, but we still seem no closer to them discussing cuts unless we see a material breakdown of incoming data. AUD/USD went on to rally 1.8% over the next two days after March’s GDP report, but that was thanks to dovish comments from Jerome Powell during his testimony to congress.

US data remains a key driver for AUD/USD traders, as it directly influences expectations for potential Fed rate cuts, and the AUD tends to move inversely to those expectations. The ISM reports serve as a prelude to Friday's nonfarm payroll report, with the services report arguably being the more important of the two. While last month's reports indicated contraction in both manufacturing and services PMIs, the 'prices paid' component grew at a faster pace, highlighting persistent inflationary pressures. Given that the S&P global flash PMIs expanded at a quicker rate, there's a possibility that the ISM PMIs will also expand. Should this be coupled with higher prices paid, it could once again dampen hopes of Fed rate cuts, support US yields and the dollar, and negatively impact AUD/USD (and broader risk sentiment).

Friday’s Nonfarm payrolls report will get the final say for how AUD/USD finishes the week. Expect traders to be on high alert for even the slightest whiff of softer jobs figures, especially if the ISM PMIs disappoint. Last month’s NFP report revealed slowest job growth in 6 months, softer earnings and an unemployment

The ECB is expected to cut interest rates by 25 basis points (bp) next week, which should mark their first cut in eight years. However, given mixed messages from ECB speakers and small signs of a strengthening economy, I doubt they will signal any further cuts. Therefore, I suspect they’ll remain tight-lipped over any future action and cling on to ‘data dependency’.

There has been speculation that the Bank of Canada (BoC) might also cut rates next week, with approximately 62% of economists polled by Bloomberg backing the move, compared to a 44% chance implied by money markets. All three of the BoC's preferred inflation measures are now within their 1-3% target band, so the case for a cut is certainly there. Personally, I'm leaning towards a dovish hold. And if they do cut, I very much doubt they'll feel the need to signal any further cuts at the meeting, given they would be the first major central bank to cut rates this cycle.

AUD/USD 20-day rolling correlation

• The inverted relationship with the US dollar remains strong with a 20-day rolling correlation of -0.95 for AUD/USD to the USD index.
• Gold and copper are the next strongest correlations, at 0.75 and 0.68 respectively.
• Although we can see that AUD/USD actually rose into the back of the week whilst gold and copper were lower following a softer PCE inflation report from the US.
• The yield differentials remains seemingly irrelevant with rolling correlation of -0.1 (zero means there is no correlation).

AUD/USD futures – market positioning from the COT report:

COT data has been delayed due to the public holiday in the US last week, so updated data will arrive tomorrow.

As a reminder:

• Net-short exposure to AUD/USD futures has declined five of the past six weeks among large speculators
• Their net-short exposure is at the least bearish level since late January and gross longs rose to a 2-month high
• However, positioning of asset managers (real money accounts) remained effectively flat, with net-short exposure remaining near its least bearish level since late January

AUD/USD technical analysis

A bullish inside week formed on AUD/USD, which provides little in the way of clues for its next directional move. Although we have seen a 2-bar reversal on the weekly chart around 67c (dark cloud cover) and 100-week EMA. And as the US dollar index is holding above its December trendline, it seems upside potential for AUD/USD may remain limited. But the same could be said for downside with net-short exposure seemingly on the decline.

The daily chart shows prices are oscillating between 0.6600 – 0.6670 for the past eight days. Moving averages reside around the lower 1-week implied volatility level ~0.6580 and the 100-week EMA and trend resistance loom overhead. For AUD/USD to rally likely requires soft PMIs and NFP reports from the US, but my inkling is that we may be on for another choppy week of trader that is better suited to intraday traders.

The 1-week implied range suggests ~66% chance that AUD/USD could close between 0.6582 – 0.6722, or between 65c and 68c over the next month.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge