AUD/USD enters the new week near three-year highs, supported by broad risk appetite, bullish futures positioning and hopes tensions between the US and China may continue to thaw. While Australian economic data is unlikely to be a major volatility driver, traders will closely monitor US inflation reports, the Trump-Xi summit in Beijing and geopolitical risks surrounding Iran and the Strait of Hormuz. With institutional positioning remaining bullish and technical support holding above 0.71, dips in AUD/USD may continue to attract buyers.
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AUD/USD Buoyant as Traders Eye Trump-Xi Summit and US Inflation Data
Australia This Week: Economic Data and Events for AUD/USD Traders
AUD/USD Traders Look Offshore for Volatility Drivers
This is not likely to be a big week for AUD/USD traders seeking volatility where domestic data is concerned, though there are plenty of ‘nice to knows’ for those keeping tabs on the economy. We’ll get a fresh update on how consumers and businesses feel about the RBA’s latest rate hike via Westpac and NAB reports on Tuesday. And the wage price index is rarely much of a market mover.
Forex traders will then need to rely on US data, or appetite for risk stemming from the Middle East. Iran rejected the latest peace proposal from the US which knocked sentiment lower on Thursday, and it continues to look likely the Strait of Hormuz will remain closed and keep crude oil prices and inflation expectations elevated.
Sticky US Inflation Yet Softer Crude Oil Keeps AUD/USD Supported
US inflation is likely to heat up further, meaning it would be more of a surprise for traders if it doesn’t. Yet the US dollar remains on the back foot as oil prices seem to have priced in the worst of the war, which seems to be heading towards a dragged out but not-quite-nuclear event after all. That is helping to lift sentiment and keep odds of Fed rate hikes in check, and support AUD/USD on appetite for risk alongside a hawkish RBA.
Trump-Xi Summit Could Provide Fresh Tailwind for Risk Assets
A high-stakes meeting between Trump and Xi Jinping in Beijing also takes place on Thursday and Friday. While no major breakthrough is expected, the fact the summit is happening at all suggests tensions may be thawing, and traders will keep an ear out for any positive headlines regarding trade, tariffs or technology restrictions. If anything, I suspect the summit could pave the way for another leg higher in risk appetite, which could support AUD/USD alongside Wall Street and weigh on the US dollar.
Of course, should talks stall or old wounds be reopened, sentiment could easily sour and drag the Australian dollar lower.
Australian Dollar Performance
It was an overall bullish week for AUD traders, although the Australian dollar lagged behind the New Zealand dollar and Chinese yuan. It was also flat against the euro and lost momentum against the British pound.
- AUD/USD closed comfortably above 0.72, marking its highest weekly close in three years.
- AUD/CAD printed its first weekly close above 0.99 since March 2018, helped by a weak Canadian employment report on Friday.
- AUD/CHF closed higher for a sixth consecutive week and has also been bullish for five straight months, although Wednesday’s lower high suggests bullish momentum may be waning.
- AUD/EUR rose for a sixth consecutive week, although the weekly doji beneath the March high suggests its winning streak may at least be due for a pause.
- AUD/GBP edged higher but also formed a small doji beneath the recent cycle high, warning of fading bullish momentum.
- AUD/JPY printed a small bullish inside week alongside a doji (indecision candle), suggesting the market’s preferred barometer for risk is not yet ready to roll over despite strong suspicions of FX intervention from Japan’s MOF.
- AUD/NZD formed a 2-bar bearish reversal on the weekly chart around 1.22, adding weight the my case for a pullback towards 1.20 as part of a rising wedge / ending diagonal pattern
Chart prepared by Matt Simpson - Source: LSEG
AUD/USD Technical Analysis: Australian Dollar vs US Dollar
AUD/USD Correlations
- Familiar relationships continue to hold true, with the inverted correlation between the US dollar and Australian dollar remaining strong and above -0.9 across the 10, 20 and 60-day lookback periods.
- The Chinese yuan (CNY) shares a strong positive correlation with AUD/USD across all three timeframes.
- Extending the China theme, copper’s correlation has risen to 0.94 over the past two weeks.
- That is also seeing its commodity FX counterpart, NZD/USD, correlate tightly with the Aussie.
- Appetite for risk on Wall Street is also keeping the S&P 500 correlation above 0.9 across all three timeframes.
Source: LSEG
AUD/USD Futures Positioning | COT Report
The weekly change of exposure was minimum overall among futures traders, though it continues to show a market of bullish defiance despite some metrics suggesting a sentiment extreme.
- Large speculators increased net-exposure to AUD/USD futures by 6.8k contracts, just 2.6k contracts short of a 13-year high
- Most of this came from fresh longs, though shorts were also trimmed by -500 contracts
- Asset managers gross-long exposure was also nudged to a fresh record high, up 1.5k contracts on the week
Source: CFTC (COT) CME, LSEG
AUD/USD Outlook: Risk Reversals and HVN Support Point to Further Upside
With my hunch that US-China talks will prove fruitful and the Aussie remaining within a solid uptrend overall, dips remain preferable — even if price action is becoming choppier on the AUD/USD daily chart.
Note that risk reversals are also trending higher alongside prices, suggesting institutions are backing the trend while expectations of downside tail risk continue to diminish.
Prices are bouncing along the 10-day EMA, and should price break below it, buyers may step in around the 20-day EMA. The daily trend remains bullish above 0.71, with a high-volume node (HVN) at 0.7158 sitting near the 20-day EMA as a potential support zone. A break above the May high (0.7282), or ideally 0.7300, could set the stage for a move towards my 0.7400 target.
Source: CME, LSEG
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-- Written by Matt Simpson
Follow Matt on Twitter @cLeverEdge
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