Record short positions in Australian dollar futures have emerged just as AUD/USD tests the neckline of a potential head-and-shoulders top. While weak employment figures have dampened RBA hike expectations and strengthened the bearish case, stretched positioning and tentative bullish divergences suggest bears should remain cautious.
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RBA Rate Hike Expectations Fade as Australian Economy Softens
The weak employment report further reduced the already declining odds of an RBA hike by December, although persistent inflation means another hike further out remains a possibility. Business and consumer confidence have also continued to deteriorate, with NAB and Westpac surveys highlighting the impact of higher interest rates and the threat of further hikes.
Australia's PMIs have also softened over the past two months, with manufacturing contracting in September for the first time since March, and at its fastest pace since December 2024. Services growth also slowed to a three-month low, according to the final S&P Global PMI report.
Flash PMIs for October will be released on Friday, and I suspect we'll see further deterioration in growth and employment, although price pressures may remain elevated.
RBA Assistant Governor Christopher Kent's pre-recorded interview offered little insight into the current policy outlook, focusing instead on the effectiveness of the RBA's pandemic-era QE programme. Attention now shifts to Kent's fireside chat on Monday and Deputy Governor Andrew Hauser's appearance on Wednesday, where markets will be looking for clues on how policymakers are balancing persistent inflation risks against signs of a weakening labour market.
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US Flash PMIs and Consumer Sentiment Lead a Quiet Calendar
The US economic calendar is relatively light next week, with housing starts, building permits and weekly jobless claims unlikely to be major market movers unless they deliver a significant surprise.
Friday's flash PMIs and final University of Michigan consumer sentiment survey are likely to attract more attention. The PMIs will provide an early indication of October's economic activity and price pressures, while the Michigan survey will offer another look at consumer confidence and inflation expectations.
With the Fed in its blackout period ahead of the October FOMC meeting, the focus will remain on incoming economic data, Treasury yields and the US dollar's response.
AUD/USD Technical Analysis: Australian Dollar vs US Dollar
AUD/USD Correlations
- Correlations with the Aussie have largely broken down in recent days, as the repricing of RBA hike expectations sent AUD/USD lower despite a pullback in the US dollar index.
- It is interesting to see the 5-day correlation between AUD/USD and CNH invert over the past week, despite retaining strong correlations with other China-linked markets such as copper and the CSI 300.
- The Australian dollar's decline despite crude oil and gold rebounding into the weekend further highlights the impact of Thursday's weak employment figures on RBA rate expectations.
Source: LSEG
AUD/USD Futures Positioning | COT Report
Bears continued to set records on the Australian dollar futures market by pushing net-short and gross-shorts to a record high. This potentially marks a sentiment extreme for both large speculators and asset managers – though that does not necessarily mean it marks a low for prices immediately.
That said, AUD/SUD is testing the neckline of a potential head and shoulders top – a bearish reversal pattern that projects an approximate downside target just below 0.6500 if it succeeds.
Source: CFTC (COT) CME, LSEG
For traders wanting a deeper understanding of futures positioning, I’ve also published a guide on how to read and interpret weekly COT data in forex markets.
AUD/USD Options and Volatility Analysis (Risk Reversals, HVN Levels)
The trend is clearly pointing lower for AUD/USD on the daily chart. But with USD retracing from resistance, while the Aussie sits on support with a potential sentiment extreme, I wonder if bulls may try to put up a fight.
Note that the AU-US 2-year yield spread is forming a slight bullish divergence, alongside slightly less bearish risk reversals. I wouldn't call these compelling bullish signals as such, but perhaps another warning for bears.
That said, with the 200-day EMA at 0.6980 and the 200-day SMA at 0.7042, bears have decent areas to fade into in anticipation of a break beneath the neckline.
Source: ICE, TradingView
Australian Dollar Performance
Chart prepared by Matt Simpson - Source: LSEG
