AUD/USD weekly outlook: AUD squares up to US dollar strength

As mentioned in last week’s outlook, Australia’s CPI data generally moves in line with New Zealand’s data. So I cannot say it came as a huge surprise when AU CPI data was broadly higher than expected, given NZ CPI data delivered the same blow to the RBNZ the week prior.

Yet maybe the expectations were set too low. Inflation is slowing overall, it’s just not slowing as quickly as many had hoped (which is probably more in line with reality). At 3.6% y/y, headline inflation has slowed for a fifth consecutive month, and whilst the 1% q/q rate was above expectations by 0.4 points, the quarterly rate is trending lower overall if we step back for a broader view.

I do not expect these figures to place the RBA into a hawkish position, but it does push back on hopes of any cuts this year. And whilst the BOE and ECB are happy to claim 'Fed independence', I very much doubt the RBA will. And that likely keeps rates at 4.35% for the remainder of the year.

Key themes and events for AUD this week:

It’s not a huge data week for Australian data, although traders should take note of the word ‘hike’ creeping back into the narrative following last week’s hot CPI figures for Australia. RBA cash rate futures implied just a 3% chance of another RBA hike, and the curve implies a rate of 4.45% by October (so just 10bp of hikes). But the fact it is creeping up at all is a concern, even if I still think the RBA will more likely hold rates at 4.35% than discuss openly hiking at this stage. But of they are to make such comments or incoming data continues to heat up, there are plenty of AUD/USD bears who may reconsider their bets, cover shorts and prompt a rally.

The Fed meeting in the early hours of Thursday will garner the most attention, even though no policy change is expected. Economic data simply does not allow for the Fed to cut rates this year, and market pricing has finally caught up with that reality. This may become a non-event as I very much doubt the Fed will dangle a potential hike in the air, even if CPI (and PCE) rose and employment data remains robust. And as there is no update to the dot plot or quarterly forecasts, traders will have to make do with the rate ‘decision’ itself and accompanying statement, which generally provides little actual guidance. All eyes will then be on Jerome Powell’s press conference 30 minutes later to see if he says anything if substance. If so, it will likely be to reiterate the need to keep rates higher for longer. Regardless, it will likely weigh on volatility on the day or two ahead of the meeting.

New Zealand’s employment report warrants a look. Even if it surpasses expectations like their CPI report did, it could provide another tailwind for the Australian dollar on fears of an RBA hike. I suspect odds of an RBA hike remain relatively low, but that’s not to say markets won’t get twitchy about stronger data from NZ and act as though it will happen to Australia.

Take note of the public holidays across Europe on Wednesday which means volatility will likely be very low – which is great for hedgers but not so for speculators.

All traders need to keep an eye on China’s PMI reports on Tuesday, although it doesn’t seem to be much of a market mover these days.

AUD/USD futures – market positioning from the COT report:

Asset managers increased their gross-short exposure to AUD/USD futures by 5.4k contracts – their fastest weekly pace in nine months. Although as 3k shorts were added, it only saw net-short exposure slow by -2.3k contracts. Net-short exposure among large speculators was trimmed by 4.8k contracts.

AUD/USD also stood up to US dollar strength last week, rising for a fifth consecutive day despite stronger US dollar following Friday’s hotter PCE inflation report. With prices failing to move materially lower despite extreme levels of net-short exposure, I continue to suspect downside potential of AUD/USD remains limited unless the wheels fall off the global or Australian economy.

AUD/USD technical analysis

AUD/USD may have risen for a fifth day, but the daily candles are leaving clues that bulls are losing steam; the past three day’s trade has produced upper wicks, two of which are shooting star candles. And as Friday’s high perfectly respected the monthly pivot point near the 0.6550 low, the 100-day and 200-day EMAs in close proximity, I am on guard for this rally to peter out or potentially retrace lower on the daily chart at the beginning of the week.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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