How bad will it go for AUD/USD?

Market Analysis /
18 Feb 2019

Last Week Market Wrap

  • China’s trade surplus data release on last Thursday spurred some buyers’ interest in AUD after it reported better than expected (or less worse) imports data as it declined only by 1.5% instead of an expected 10%. Exports were up by 9%.
  • Softer than expected PPI and CPI data from China triggered an early intra-day sell off but it was short lived after renewed optimism on the US-China trade negotiations dominated headlines on late Friday.
  • US-China Trade negotations in Beijing concluded with both sides expressing optimism that they made significant progress in resolving their disputes. Though much is left to be done, this news was enough to fuel risk-on sentiments on Friday and helped propel the proxy-China AUD higher against the USD.
  • The AUD also benefitted from a rally in commodity prices, mainly copper as risk-on tone and bullish sentiments surrounding commodities underpin the move.
  • The US was hit with a slew of negative data releases which its CPI, Core Retail Sales, Retail Sales and PPI data came out worse than expected. Core Retail Sales and Retail sales got the worse end of the stick, missing the targets significantly and subsequently caused US Dollar to pull back against other currencies. (example: Sharp rises in GBP/USD and NZD/USD were observed on last Friday).
  • The US government averted a government shutdown on 15 February after President Trump agreed to sign off a funding bill to keep the government open. However, the spending measure agreed by congress fell short of his demands and in defiance, he declared national emergency to make up for the rest of the funds needed to complete the wall. This drew instant critism and legal ramifcations from the Democrats.

The Week Ahead

  • RBA Monetary policy meeting minutes on Tuesday and Governor Lowe to testify in parliament on Friday. These events may renew selling pressures on the AUD if RBA’s dovish stance is further reinforced.
  • A plethora of Australia’s employment data release on Wednesday and Thursday will likely add to the possibility of a rate cut by RBA if it surprises on the downside.
  • Look out for any negativity or less positive on US-China trade talks in Washington. This week’s talk will decide whether Trump-Xi gets another meeting or if the deadline will be further extended to allow for more negotiations. It seems that the latter has a higher possibility as Trump already hinted at it last week.

Roadblocks ahead for AUD, but USD isn’t looking that great either

Despite the negativity surrounding RBA’s recent switch to neutral policy stance, the AUD was able to stage a modest recovery last week due to weakenss in the US data and optimism surrounding the US-China trade talks.

Slowing global economic growth made worse by the US-China trade war, dismal retail sales figures and deep correction in the housing market led to RBA’s switch in stance to a more neutral approach.

Therefore,  focus of the week would be Australia’s employment numbers which had held up well so far, with the unemployment rate hovering between 5% to 5.3%. It is expected that it will remain unchanged at 5%. If employment numbers disappoint in the upcoming days, we may very well see RBA tilt to a completely dovish stance.

On the other side of the coin, the US-China trade talks optimism continues to hold AUD up when things are in the doldrums. Though the situation is still delicate with much distance to be covered for both sides, a slight improvement like a delay in imposing additional tariff, may help to lift risk sentiments, boosting the AUD. Moreover, on the backdrop of US Fed’s dovishness and softer retail sales data, the USD strength may stall further. The current political tension in the US due to the national emergency being declared will also likely weigh on the USD.

Hence, this leads us to believe that the drop in AUD/USD may be muted in the coming week, unless the trade war escalates  further or US related events surprise on the upside.

AUD/USD Technical Analysis

Risk on sentiments helped the AUD/USD rebound last week after the sell-off in the prior week. It managed to close off the week modestly higher at 0.71369. Bullish interest can be seen supporting the price at the region between 0.70200 to 0.71000. If the sell down resumes this week but the support area holds well,  price may eventually retest the resistance level of 0.72680. Breaking this resistance could send price up to the next resistance at 0.73750.

However, if employment data disappoints and/or the trade war escalates, there may be enough momentum to break the support region mentioned above and could fall quickly to the next support at 0.68257.

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