AUDUSD faces massive test next week

The AUD/USD rose on Friday after finding decent support on Thursday afternoon from a slightly weaker US dollar. Traders also shrugged off the disappointing Chinese trade data that were published earlier in the day on Thursday, which showed a drop in copper and overall imports and fewer goods were exported too. Given that China is Australia’s largest trading partner, you would have thought that this would weigh on the Aussie. Yet, the AUD/USD was able to march higher at the end of this week, possibly because of the improvement in general risk sentiment as stocks and oil also bounced back. At the time of this writing, the Aussie was also higher on week but crucially it was still holding within its long-term bearish channel – more on this later.

But form a fundamental point of view, next week will be a key one for the AUD/USD due to the sheer number of top-tier economic data from Australia, China and the US. It will all kick off on Tuesday with the publication of the latest CPI inflation data form the US. This could potentially have a big impact on rate hike expectations, and in turn the US dollar, provided that the data deviates from expectations. Meanwhile Australia’s treasury will publish on Wednesday its mid-year economic and fiscal outlook, which will include updated growth forecasts. The always-important Australian employment figures will be released a day later on Thursday. We have all that to look forward to. But there is more: China will be releasing some important economic pointers of its own, including GDP and industrial production figures on Wednesday. If the trade figures, which were released on Thursday of this week, are anything to go by, then China’s economic figures next week could disappoint expectations and potentially cause the Aussie dollar to slump.

Meanwhile in the US, the general consensus is that a likely victory for Hillary Clinton in the presidential race will allow the Fed to raise interest rates in December. Unless something changes dramatically now, the rising expectations of a tighter policy stance from the Fed will likely cause US bond yields to rise further and trigger a rally in the US dollar, which in turn may have negative implications on dollar-denominated precious and base metals. This will probably not be good news for the Chinese or the Australian economies, with the latter being a large exporter of base metals to the former. The potential rise in US government bond yields will probably also reduce the attractiveness of the Australian and New Zealand dollars on a relative basis, which had been supported, until now, by the higher interest rates in those nations. Unless the Fed now delays a rate hike this year, the differential between Australia and US bond yields should narrow further, causing a drop in the AUD/USD currency pair. That being said, a US rate rise may already be priced in, so it is not as simple as that.

Luckily, the AUD/USD is at a crossroads, which, from a technical stand point, means market participants could just wait for the pair to make its move and take advantage of the break in the direction of the break, without having to keep up with abovementioned fundamental events, though that might be better.

As can be seen from the weekly chart, the AUD/USD has struggled to get past the 0.75-0.77 area in recent times which is important to note because this is where the top of the long-term bearish channel comes into play. Thus a potential move lower from here should not come as a surprise. The bears will now want to see the breakdown of the intermediate bullish trend line, which held again at just above the 0.7500 handle this week. Below here, the prior short-term swing low is at 0.7440 and then there is little further reference points seen until 0.7150, the low from May. These are among our bearish targets for this pair.

That being said, our bearish view would become invalidated should the Aussie stages a breakout from that long-term bearish channel and ideally confirmed by a weekly close above the 0.7700/20 resistance area. If that were to happen then the Aussie could easily rally towards the next psychological level 0.8000.

Source: eSignal and FOREX.com