AUD/USD weekly outlook: Can seasonality save the Aussie?

• Prospects of a BOJ hike saw AUD lose the most ground against the yen last week
• At -3.1%, it was the worst week for AUD/JPY in 11
• AUD/USD only managed a marginal gain despite the US dollar retracing lower, as the Aussie continues to take its cue from China’s markets
• A host of domestic data including retail sales, GDP is on focus for AUD/USD traders, although it is unlikely to deter the RBA from holding at 4.35% into next year
• China’s PMIs, ISM PMIs and nonfarm payroll reports could also mix things up and provide pockets of volatility for traders

AUD/USD correlations:

• China remains a dominant force for the direction of the Australian dollar, given its tight correlation with the yuan, copper and iron ore prices
• Although the US dollar remains a strong driver also with an inverted correlation score of -0.8
• The relationship between AUD/USD and the S&P 500 has continued evaporate to the point its 20-day correlation dropping close to zero (no relationship)

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

I’m not getting any strong directional clues from the change of positioning this week, although it is tilted slightly towards the bearish side given the stronger rise of net-short exposure among asset managers. It is possible we may see AUD/USD retrace higher this month given the US dollar’s tendency to underperform this month, and AUD/USD appears oversold while the USD could be due a pullback after a strong performance so far this quarter. But on the same token, upside potential for AUD/USD could be limited given the strong fundamentals backing the US dollar.

• Only minor adjustments were made over the past week among AUD/USD futures traders
• Net-long exposure among large speculators increased by 1.8k contracts, which takes positioning just beneath a 7-year high (1.3k short contracts were added alongside 3.1k longs)
• However, asset managers increased net-short exposure by 5.9k contracts (6k short contracts added, 131 longs trimmed)
• Open interest increased for the first week in six alongside speculative volumes

AUD/USD seasonality

The Australian dollar has not tracked its seasonality particularly closely this year, as it has generally posted gains during typically weak months or losses during times of expected gains. Average returns for December are usually the second strongest of the year at 0.45% over the past 40 years, although its win rate is just 52%. Its median (typical) return is also a measly 0.09%. And with Trump and Fed expectations dominating the USD dollar side of the equation while AUD tends to take its lead from China, I’m not hanging my hat on the prospects of a strong month for AUD/USD. But for that to happen, we’d need to see China’s markets bounce and the US dollar to post a deeper correction against its strong trend.

AUD/USD technical analysis

A spinning top Doji formed on the weekly chart following its inside candle the week prior, to show demand around 0.6440. Yet it also shows hesitancy to break higher, and this could just be a pause in the trend following a 6-week decline from the September high.

However, a small bullish divergence has formed on the weekly RSI (2) and a more established bullish divergence is on the daily RSI (14). Yet several levels of resistance loom overhead including the October low, monthly pivot point and 50% retracement level.

Ultimately, AUD/USD seems to a be a market which could favour range-trading strategies (fading into resistance or seeking longs around support levels). Note the daily RSI (2) is also nearing overbought to suggest a swing high could be close to forming.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge