Australian Dollar Outlook: AUD/USD Rally Meets ISM, NFP and DXY Support

The Australian dollar enters the week on a four-week winning streak after broad US dollar weakness following the FOMC meeting and coordinated yen intervention lifted AUD/USD. But with the US dollar index testing a major support zone and ISM and nonfarm payrolls due this week, the Aussie may need a fresh catalyst to extend its gains.

 

 

 

AUD/USD Rally Meets DXY Support Ahead of ISM and NFP

The Australian dollar largely escaped the extreme volatility seen in the Japanese yen late last week, when several yen crosses unwound moves that had accumulated over the previous three months. The BOJ's suspected intervention shook out what had arguably become crowded long-yen positions, before another bout of yen strength emerged after the US Treasury threw its support behind Japan's efforts.

Meanwhile, expectations for another RBA rate hike eased after Australia's softer-than-expected CPI report. Markets have effectively ruled out a September move, although the cash rate curve is still pricing a small chance of one final 25bp hike by December.

 

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

 

Nonfarm Payrolls and ISM Data Could Reshape Fed Expectations

The nonfarm payrolls and ISM reports are the main calendar events this week, as they could help reshape Fed policy expectations following last week's slightly less-hawkish than expected decision to leave interest rates on hold. The Middle East flare-up also raises concerns about potential inflationary pressures, with Fed funds futures continuing to price a 74% probability of a September hike and a 41% chance of another in December.

But if recent trends in the ISM services and nonfarm payrolls reports are repeated, it could still leave some doubt over that second hike. Headline job growth has slowed for three consecutive months, from 214k to 57k, although unemployment has edged back to a healthy 4.2%. ISM PMIs also eased slightly while prices paid retreated from their multi-year highs. The risk, of course, is that nonfarm payrolls delivers another strong upside surprise and prices paid rebound on the back of higher crude oil prices in recent weeks. That could lift the probability of a December hike above 50%, support the US dollar, and weigh on AUD/USD.

Source: BLS, ISM, LSEG

 

 

 

AUD/USD Technical Analysis: Australian Dollar vs US Dollar

AUD/USD Correlations Face a DXY Reality Check

AUD/USD remains most inversely correlated with the US dollar, with the 10-day correlation strengthening to -0.86. Positive correlations with the New Zealand dollar (0.92), copper (0.98) and the yuan (0.83) also remain firm, highlighting the importance of China sentiment and industrial metals. The S&P 500 has swung back to a strong positive correlation (0.89), while WTI crude has flipped negative, suggesting higher oil prices are currently weighing on AUD/USD rather than supporting commodity currencies.

Source: LSEG

 

 

AUD/USD Futures Positioning | COT Report

The Aussie has continued to defy the bears, rising for a fourth consecutive week and is out of the gates trying to notch up a fifth. Gross shorts continued to trend higher among large speculators and asset managers, dragging speculators' net-short exposure to a seven-month high of nearly 40k contracts.

Yet we should also note the gradual rise in gross longs among asset managers, who have added nearly 14k contracts over the past three weeks (26.4%) to take their gross-long exposure to 13.8k contracts.

Source: CFTC (COT) CME, LSEG

 

 

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

With the US dollar index falling sharply following the FOMC meeting and coordinated yen intervention, AUD/USD has gained another source of support. But with the US dollar now sitting near a key support cluster, a runaway rally is far from assured.

Note that the US dollar index (left) is testing its 200-day EMA, sitting just above the 2026 bullish trendline and the 99.384 swing low. Given the speed of last week's selloff, this support area could prove favourable for dollar bulls over the near term, potentially capping AUD/USD's upside.

 

 

 

US Dollar Support Could Limit AUD/USD Gains

AUD/USD (right) is also approaching its prior swing high while the Australia-US 2-year yield spread continues to point lower. That divergence also suggests upside may be limited, particularly if the ISM or nonfarm payrolls reports surprise to the upside, as I suspect they might.

For now, AUD/USD risk reversals continue to edge higher, suggesting demand for calls is increasing relative to puts. Even so, bears may be looking for evidence of a swing high and a pullback towards 70c. A break below that level would bring Thursday's low near 0.6950 into focus.

The most bullish scenario for AUD/USD this week would likely require a combination of weaker-than-expected US economic data and further rounds of yen intervention. For now, the latter appears to be weighing on the US dollar while supporting the Japanese yen.

Source: ICE, TradingView