AUD/USD weekly outlook: Aussie squares up to its 200-day MA

• Despite a 170-pip decline on Monday, AUD/USD snapped a 3-week losing streak thanks to a lift in sentiment as the week progressed
• The rise of commodity prices saw the Australian dollar close up against all major currencies except the Canadian dollar
• Commodity prices remain (and sentiment) remain a key driver for AUD/USD
• AU wages, employment, RBNZ meeting, plus CPI and retail data from the US are key events for AUD/USD traders this week

Two RBA speeches take place on Monday and Friday. Deputy governor Andrew Hauser speaks at the ESA Business Lunch in Brisbane at 09:30 Monday, and Governor Michelle Bullock appears before the House of Representatives on Economics in Canberra on Friday at 09:30. It is likely they’ll retain their hawkish mantra, the bigger question is whether they will sound hawkish enough for markets to believe them. Given wages and employment figures would have been released by the time Bullock hits the wires on Friday, she’ll have a greater ability to sway market opinion towards a hike should the data come in hot. But as things stand, economists and market pricing favour 4.35% to be the peak, even if there is disagreement of when the first cut could arrive. Personally, I doubt we’ll be gifted with a rate cut this year without a recession in the US or Australia.

Australian business and consumer confidence reports are released on Tuesday. Westpac cited strained family finances, a big decline among middle-income earners, a muted lift from stage-3 tax cuts and weak buyer sentiment for houses in their July report. It shows that hikes are working to a degree, even if inflation remains higher than the RBA would like. But they also noted a 60% rise in hike expectations, alongside a steady outlook for the labour markets. This balanced outlook keeps the cash rate at 4.35% in my view. NAB’s business conditions index drifted to its lowest level since January 2022, cost pressures eased and the employment outlook lumped according to their July report. A continuation of this trend could further take the edge off hawkish RBA comments, although employment may be the more volatile data point.

Australia’s quarterly wage price index and monthly employment report are released on Wednesday and Thursday. Wage does not tend to be much of a market mover, and the RBA suspect wages topped in Q1. Ideally a quarterly print of 0.7% lower is coupled with an annual rate of 4% or less to reinforce this view (and the lower the better for RBA doves). While unemployment data ticked higher to 4.1%, headline and full-time jobs figures remain robust, as does the participation read. So unless we see a notable drop in these figures alongside an unemployment rate of 4.2% or greater, it keeps the pressure on the RBA to retain a hawkish. Even though consumer and business sentiment reports point to a slowdown.

The RBNZ are expected to cut their cash rate on Wednesday. A 25bp cut would lower the cash rate to 5.25% and mark their first cut since the Pandemic. While that is still a 90bp above the RBA’s 4.35% cash rate, it removes some pressure form the RBA to hike. The real question is whether the RBNZ will signal further cuts, as this could weigh further on NZD/USD and therefore AUD/USD.

US inflation and retail sales are key reports. Odds favour a further slowdown in CPI figures which should appease Fed doves, weigh on the US dollar and lift AUD/USD accordingly. And that could be exacerbated should retail sales also come off and point to weaker consumer sentiment.

AUD/USD 20-day rolling correlation

• Commodities retained a tight correlation with AUD/USD last week, particularly copper and crude oil
• The relationship with iron ore also remained positive, although slightly weaker with a 20-day correlation of 0.7
• The correlation between AUD/USD and the US dollar index remained very low (or non-existent) at 0.3

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

• Net-short exposure among large speculators and asset managers increased for a third week
• However, the increase of just 8.8k contracts was the smallest of the three weeks among large specs, and almost non-existent among asset managers with the 1.4k contact increase
• The latest COT data also does not capture the bulk of AUD/USD’s recovery between Wednesday to Thursday, so we may find that net-short exposure actually diminished in this week’s report

AUD/USD technical analysis

The strong rebound following the false break of the April low shows there is no real appetite to drive AUD/USD below 64c. As suspected on Friday, AUD/USD continued to push higher marginally before meeting resistance around the 200-day MA and 66c handle, forcing a minor retracement. And given AUD/USD closed higher last week despite a disastrous 170-pip decline on Monday, the bias this week is to seek dips for an anticipated return above the 200-day MA. How far it can trade above it comes down to incoming data, where the most bullish scenario is likely to be a combination of ok or better jobs and wages figures from Australia, RBNZ not signalling any more cuts at their meeting and US CPI and retail sales coming in soft – but not too soft to rekindle fears of a hard landing. As the soft-landing scenario tends to point to risk on via a lower US dollar and US yields, and therefore supporting AUD/USD.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge