AUD/USD weekly outlook: May 26, 2024

We can probably expect a quiet start to the week with the UK and US on public holidays on Monday, although appetite for risk (and therefore AUD/USD) could benefit from strong industrial profit data from China on Monday.

Revised GDP data for the US will be released on Thursday. Whilst this is generally not an exciting release for markets, trades are likely to take more notice if growth is revised higher as it feeds back into the ‘higher for longer’ Fed rates narrative. And that could set the tone for the big calendar event of the week, US PCE inflation on Friday. Hot figures from either set could further strengthen the US dollar and yields to weigh on AUD/USD.

Australian retail sales and inflation data in focus

Domestically, the retail sales and the monthly CPI report stand out as data points worth keeping an eye on, given the RBA struck a slightly hawkish tone in their policy minutes. Although they had little choice with inflation data ticking higher and their desire to keep inflation expectations lower. Yet with retail sales underperforming so far this year, the strain on demand is apparent. We have also seen wages and employment data soften since the RBA’s last meeting.

So keep an eye on Tuesday’s retail sales figures, keeping in mind AUD/USD fell around -1.4% by the day’s close following last month’s soft retail sales and China PMIs. In all likelihood, retail sales will remain subdued and inflation will remain too high for the RBA’s liking. And neither seem likely to move the needle for the RBA’s policy in either direction. 

To remove the RBA’s slightly hawkish bias requires inflation to fall with retail sales, and employment data to deteriorate further. For now, I see little chance of the RBA changing their cash rate from 4.35%.

AUD/USD 20-day rolling correlation

• If you needed proof that AUD/USD really is just taking its directional cue from the US dollar, it can be seen in the chart below
• The 20-day correlation between AUD/USD and DXY is -0.97 which shows a strong inverted relationship (-1 would be perfectly inverted)
• Its positive correlation with gold and copper also increased over the past week, as all markets fell in tandem due to the stronger US dollar on the prospects of ‘higher for longer’ Fed rates
• Also note that the positive correlation between AUD/USD and iron ore is rising, although not strong at just 0.56

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

• Net-short exposure among large speculators and asset managers fell to the least bearish level since late January
• Gross shorts were trimmed and new longs initiated
• However, as this data is only complete up to Tuesday 14^th May, it does not account for the -0.7% fall on Wednesday
• Regardless, the reduction of short interest is a trend and that suggests limited downside for the Australian dollar

AUD/USD technical analysis:

A two-bar bearish reversal pattern has formed on the weekly chart of AUD/USD (dark clod cover) which suggests further downside ahead. Although as stated in the cot analysis, its downside may be limited with futures traders generally trimming shorts in exchange for longs in recent weeks. But the reversal pattern below trend resistance clearly shows a hesitancy to continue higher for now. And that favours ‘sell the rallies’ on the daily chart or below.

The daily chart shows a bullish engulfing candle for Friday, which sent the RSI (2) over 50 after sitting on oversold on Wednesday and Thursday. With the UK and US on a public holiday on Monday, volatility is expected to be low. But it may allow AUD/USD to drift higher at the beginning of the week. At which point, bears could seek evidence of a swing high below 0.6650 or 0.6680 for an anticipated move lower.

Options markets suggests with a 66% probability that AUD/USD will close between 0.6560 – 0.6680 this week. 

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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