Australian Dollar Outlook: AUD/USD Extends Gains, But Pullback Risks Remain

AUD/USD enters the week on a firmer footing after improving risk sentiment and a weaker US dollar helped lift the Australian dollar across most major currencies. While momentum remains supportive and further gains cannot be ruled out, positioning data and technical signals suggest pullback risks remain. Australian GDP, US ISM PMIs and Nonfarm Payrolls could prove pivotal in determining whether AUD/USD extends its rally or begins a deeper correction.

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Australian Dollar Rally Faces Economic Tests

AUD/USD Caught Between Risk Sentiment and RBA Expectations

Optimism prevailed heading into the weekend after Trump announced that the US blockade of Iranian vessels would be lifted. The news sent crude oil to a three-week low, Wall Street to a record high, and gold lower. A weaker US dollar and improving risk sentiment helped AUD/USD reach a 10-day high, briefly touch 72c, and gain against all major currencies last week except the New Zealand dollar.

Once again, the Australian dollar finds itself caught between opposing forces from the Middle East and interest rate expectations, although the drivers have flipped. Hopes of de-escalation in the conflict remain alive, while expectations for further RBA rate hikes have softened. That combination could result in choppy trade with an upside bias this week.

Source: ICE, TradingView

 

AUD Crosses Point to Mixed Technical Signals

• AUD/USD formed a small bullish engulfing week, and is considering a break above 72c – though it may require a true risk-on catalyst for the Aussie to break above the May high (0.7226)
• AUD/CAD stands a better chance of breaking its May high and touching parity with Canada entering a technical recession amid another weak GDP report
• AUD/CHF remains support around 0.56 amid a solid uptrend, though reversal candles below 0.57 warned of its potential to pause for break – of not retrace lower
• AUD/EUR continues to print narrow open-to-close weekly range coupled with higher and lower wicks, to denote indecision around its cycle high – which doesn’t inspire for bulls or bears over the near term
• AUD/GBP bullish inside week shows bears lost control, though the daily chart suggests its drift higher could be corrective and therefore shows the potential for the Aussie to lose ground against the British pound 
• AUD/JPY looks like it want to have a crack at 115 following its bullish engulfing week after the prior doji, though the risks is market forces and concerns over further MOF intervention could cap gains 
• AUD/NZD suffered its worst week in 14 months to suggest a significant top has been seen after an otherwise solid rally

 

 

Australia This Week: Economic Data and Events for AUD/USD Traders

RBA on Track for a Hawkish Hike

While Australian inflation prices rose, they could have been worse. Headline CPI slowed to 4.2% y/y from 4.4%, with housing, transport and food all slowing their advance. Trimmed mean inflation at 3.4% allows the RBA to retain a hawkish bias, though weak employment figures and weak household spending data could allow the RBA to pause and ponder, after three consecutive 25bp hikes.

Attention now shifts to Q1 GDP report on Wednesday, though on Tuesday we’ll see how much of an impact net exports contributed to the growth figures. And a bear or miss here can trigger updated forecasts from the big four banks and have more of a market impact on AUD/USD than the GDP report itself.

Source: ABS, X.com

 

ISM PMIs to Test the Growth Narrative

ISM PMIs will, of course, warrant close attention. However, markets may have become somewhat accustomed to seeing the prices paid components surge, particularly within manufacturing. Both the manufacturing and services PMIs have remained above 50, signalling continued expansion. Yet the longer elevated oil prices and inflationary pressures persist, the greater the risk that headline PMIs slip below 50 and signal contraction.

Conversely, if PMIs continue to indicate positive growth, it would suggest the economy is absorbing higher prices relatively well and strengthen the case for the Federal Reserve to deliver further rate hikes.

 

Nonfarm Payrolls Continue to Defy Expectations

Nonfarm payrolls are released on Friday and, to their credit, the labour market has been putting up a fight. The past two reports have both exceeded expectations, with job growth more than offsetting February's negative print of -156k.

What makes this trend particularly interesting is that payroll growth had been slowing steadily since its post-pandemic peak. To see employment growth reaccelerate while unemployment appears to have topped out is another reason for traders to remain alert to the prospect of further Fed rate hikes later this year.

Source: BLS, ISM, LSEG

 

AUD/USD Technical Analysis: Australian Dollar vs US Dollar

AUD/USD Correlations: Aussie Tracks Risk Appetite and the US Dollar

AUD/USD remains most closely tied to broad risk sentiment and the US dollar. The strongest 60-day correlations are with NZD, the S&P 500 and DXY, while shorter-term correlations show an even tighter inverse relationship with the greenback.

The latest 3-day readings suggest risk appetite has become the dominant driver, with AUD/USD moving almost tick-for-tick against DXY and alongside CNH and NZD. Correlations with commodities remain mixed, highlighting that currency and risk flows are currently exerting a greater influence on the Aussie than raw materials.

Source: LSEG

 

 

AUD/USD Futures Positioning | COT Report

Futures traders not only continued to shy away from their long Aussie exposure, but also actively bet against it. Large speculators increased their gross shorts while reducing longs from what had become arguably stretched positioning. Most notably, gross longs declined by 17.9k contracts (-18.2%), while shorts rose by 3.5k (+6.2%).

The fact that the reduction in longs outweighed the increase in shorts by more than four to one suggests any AUD/USD pullback may be relatively contained, with any correction potentially unfolding in a choppy manner. Still, after rallying to just shy of 73c, a move back towards 70c would not be excessive and could occur without undermining the broader bullish outlook for the year ahead.

Source: CFTC (COT) CME, LSEG

 

AUD/USD Rally Looks Corrective Below Cycle Highs

My view has not changed materially from last week, although it does require some refinement. The swing high that was expected to hold for bears failed to do so, with momentum carrying AUD/USD towards 72c. Further gains remain possible this week if Middle East headlines continue to support risk sentiment.

However, I continue to view the price action on the daily chart as corrective. Unless we receive decisively positive news for risk assets alongside strong domestic data and weaker data from the US, my preference is to fade rallies below the cycle highs in anticipation of a move back towards 70c.

At that point, I would assess the potential for the final low of an ABC correction before bulls attempt to push AUD/USD to fresh cycle highs.

The alternative scenario is that the low around 71c is already in place and the Australian dollar continues to rise from here.

Source: LSEG

 

 

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-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge