Australian Dollar Outlook: AUD/USD Grinds into Jobs, DXY Holds Support

AUD/USD extended its rally to a seventh consecutive week, although momentum remains far from convincing. RBA and Fed rate expectations are finely balanced, leaving Thursday’s Australian employment report as the main domestic event. With yield differentials and options sentiment supporting the Aussie but DXY holding above support, a stronger catalyst may be required to drive AUD/USD sustainably above 71c.

 

 

 

 

AUD/USD Grinds Higher as Jobs Data Looms and DXY Holds Support

RBA Retains Hawkish Bias, but a Hike Seems Unlikely for Now

The RBA delivered their slightly hawkish hold, though I’m not overly concerned with their obligatory threat to raise rates if necessary. The Middle East did not provide the secondary surge in inflation as feared – even though inflation remains above target. RBA cash rate futures imply just 15bp of hikes by March, though the odds of a December hike sit at around 50%. Ultimately, there seems to be little reason to expect an imminent hike unless incoming data perks up notably.

 

RBA-Fed Policy Stalemate Gives AUD/USD a Slight Edge

The US dollar faced fresh selling pressure on Friday after a soft retail sales report. Its 0.9% decline in July was its first contraction in nine months, with core retail sales also dipping 0.2%. Producer prices also failed to reignite hawkish Fed bets, while consumer sentiment deteriorated in July according to the University of Michigan. Together with a soft but still elevated CPI print, the odds of a Fed hike this year remained below 50% according to Fed funds futures by Friday’s close.

And that means we now have the RBA and Fed at a stalemate regarding policy expectations, which could keep volatility capped. But it may provide the Australian dollar with a slight advantage over the US dollar, given the RBA’s higher base rate relative to the Fed’s.

 

 

 

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

Consumer Confidence Rebound Unlikely to Shift RBA Outlook

Westpac’s consumer confidence increased 4.1% in July from relatively low levels, with its 83.9 print still in the bottom 10% of all-time readings. The family finances versus a year ago sub-index increased 5.6% to 71.1, while job-loss concerns eased. Lower fuel prices also provided some relief to households. The updated report lands on Tuesday, though it is hard to envisage either a sufficiently strong rebound to materially lift rate-hike expectations or a collapse severe enough to bring an immediate rate cut into play.

 

 

Strong Jobs Report Needed to Shift AUD/USD

Thursday’s labour force report is the main domestic event. While headline job growth was strong in June at 76.3k, it came alongside a 0.3 percentage point rise in the participation rate to 67%, an 11-month high. It’s therefore possible that job growth will struggle to maintain that pace, but still print a reasonable figure while unemployment remains around 4.4%. None of this will likely move the needle for the RBA if that turns out to be the case. Therefore, a strong report is likely required to prompt a reaction from AUD/USD, as a hike is more likely than a cut and could bolster bets for a December hike.

Australia’s wage price index and flash PMIs will of course warrant a look, though neither tends to be a strong market mover for AUD/USD traders. I am also doubtful that the two speeches from RBA members this week will prompt any major changes to policy expectations.

It is a relatively quiet calendar for the US, though PMIs will be the main focus on Friday. And with traders now fully honed in on the potential for a weaker US economy, it might not take much of a PMI miss to weigh on the US dollar, especially if the prices paid and employment sub-indices fall further.
 

 

AUD/USD Technical Analysis: Australian Dollar vs US Dollar

AUD/USD Correlations

• AUD/USD remains strongly inversely correlated with the US dollar, at -0.80 over 20 days, although this has weakened to -0.61 over 10 days.
• The yuan remains a strong positive influence, with CNH correlations of 0.90 over 20 days and 0.77 over 10 days.
• Risk appetite remains supportive, with AUD/USD holding a 0.90 correlation with the S&P 500 over 20 days.
• Commodity signals are mixed: gold remains positively correlated, while copper has sharply decoupled and iron ore remains negatively correlated.

Source: LSEG

 

 

AUD/USD Futures Positioning | COT Report

The Aussie continues to defy gravity, at least where bearish futures traders are concerned. AUD/USD closed higher for a seventh consecutive week – its best such sun since December 2020. Yet traders remained net-short, and slightly more so than the prior week. Gross longs and gross shorts are trending higher among large speculators and asset managers, though fresh shorts have the slight edge.

With traders sat on the fence over a single hike by December, a slightly underwhelming employment report could see those odds drop below 50% and stifle the Australian dollar’s rally. And if the correct catalyst comes, we can consider the potential for a ‘right shoulder’ to form on the AUD/USD for a head and shoulders top.

Source: CFTC (COT) CME, LSEG

 

 

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AUD/USD Options and Volatility Analysis (Risk Reversals, HVN Levels)

Implied volatility has fallen to its lowest level this year, according to the options market. That has seen the one-week implied volatility range narrow to 100 pips, which means traders currently estimate a 50-pip move either side of current levels by Friday. Also note that the open-to-low range between Monday and Thursday was a mere 10 pips, less than 20% of its 52-pip high-to-low range.

Were it not for weak retail sales on Friday, AUD/USD would have struggled to close the week at a 10-week high or tally up its seventh consecutive bullish week. Ultimately, the Australian dollar’s lacklustre rally is being driven primarily by rising yield differentials and a weaker US dollar. So it likely needs the US dollar index to break beneath its 99.38 low before we can expect the Aussie to rip higher with conviction. But with yield differentials and risk reversals tending higher, the path of least resistance tilts higher for now. 71c is the next major hurdle, a break above which brings a prior weekly VPOC into focus at 0.7141. Should momentum turn lower, next major support for AUD/USD is around 70c.

Source: ICE, TradingView

 

 

 

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge