Dow Jones, copper, crude oil, AUD/USD trade setups ahead of nonfarm payrolls

• Cyclical assets have benefitted recently from expectations for solid economic growth, vastly lower interest rates and a softer US dollar
• Markets expected the same thing earlier this year, but were proven wrong
• US economic data is starting to impress again. US rates and FX traders are taking note
• A strong US payrolls report may be bad news for cyclicals, and viced versus if weak

Overview

Cyclical asset classes have performed well recently, benefitting not only from ongoing hopes for a soft landing for the global economy but also expectations for substantially lower interest rates and a weaker US dollar. But what if markets, collectively, are wrong about the outlook again like were at the start of the year? We look at the implications for the Dow Jones Industrial Average, copper, crude oil and the Aussie dollar.

US rates breaking down as DXY breaks higher

As covered in a research note on Thursday, US economic data is starting to impress again, as was the case at the turn of this year when markets had around seven cuts priced in over 2024. Now we have eight priced by the end of 2025, on top of the jumbo 50-pointer already delivered by the Fed in September. With so much easing priced in, the improvement in the data has not been lost on US markets. 

The US dollar index is breaking higher.

Just as US two-year Treasury note futures are simultaneously breaking lower.

A repeat of early 2024 all over again?

You get the sense traders are nervous about soft landing hopes morphing to no landing fears again, making Friday’s nonfarm payrolls report incredibly important not only for the path of US interest rates and dollar, but also cyclical assets more broadly.

A combination of unemployment at 4.1% or lower with stronger payrolls growth could do some damage to cyclicals despite implying economic activity may be picking up. Of course, the opposite outcome may actually benefit cyclicals as long as it’s not weak enough to spark recession fears. Recent data flow suggests such an outcome is unlikely.

For cyclical assets, I expect good news will be bad news while bad news will be good.

Dow Jones reluctant to revisit record high

Dow futures remain rangebound heading into payrolls, finding bids on dips towards support at 42067 without threatening the record high of 43005 set on September 27. Perhaps it was the shooting star candle that printed that day, but traders have not been willing to go near it since.

With RSI (14) diverging from price and MACD confirming the bearish signal on momentum, it feels like risks are biased to the downside near-term, especially with so much good news priced in from a fundamental perspective. It feels like we may get some resolution on directional risks today given the payrolls report will likely play a big part in determining how quickly the Fed will cut interest rates.

Sellers have been parked above 42600 since the reversal from the record highs. On the downside, should 42067 be broken definitively, look for a potential push down towards 41633, the 50-day moving average, or uptrend running from the August lows.

COMEX copper not confirming bullish China sentiment

COMEX copper looks similar to the Dow chart, remaining rangebound after a large reversal last Friday.

Unlike the euphoric price action in Chinese stock futures, copper looks anything but enthusiastic with bearish divergence between RSI (14) and price, and Thursdays bearish engulfing candle, warning of reversal risks.

On the downside, buyers are lurking around $4.541 as demonstrated by the long downside wicks through the level. If that were to subside, the uptrend running from early September and $4.398 are potential downside targets.

On the topside, gains were capped beneath $4.664 this week, making that a level of note. $4.777 and $4.829 are the next after that.

Crude busts through key levels

Crude oil has responded as you’d expect given escalating tensions in the Middle East, breaking through a series of topside levels including $70, 50-day moving average, $72.34, 200-day moving average, along with former uptrend support. Big volumes have accompanied the move, adding to the bullish signal provided by the price and momentum indicators.

The payrolls report is unlikely to be the biggest influence on the crude price today, but it will have some impact around the time of the release given the implications for demand and US dollar.

Those considering longs could buy dips towards the 200DMA with a stop below the uptrend for protection. Targets include $76.42, long-running downtrend resistance around $77.20, along with $77.81.

If the price were to reverse back through the 200DMA and uptrend, you could flip the setup around, selling below with a stop above for protection. Targets include $72.34, 50DMA and $70.

AUD/USD biased downside near-term

AUD/USD looks heavy on the daily timeframe, rejected at long-running downtrend resistance earlier this week before breaking uptrend support, delivering the reversal down to former downtrend resistance around .6830. With MACD and RSI (14) generating bearish signals on momentum, selling rallies and breaks is preferred near-term.

If the price were to break below .6830 definitively, it may open the door for a retracement towards .6733, 50DMA, or .66857.

A break above the 2024 high around .6945 may prove difficult near-term given the geopolitical environment, but if it were to go the next topside level of note is .7137.

-- Written by David Scutt

Follow David on Twitter @scutty