AUD/USD weekly outlook: The Aussie’s breakout could have legs

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The Week Ahead: Powell testimony, US CPI, RBNZ and French Election

AUD/USD outlook: RBA mins point to quarterly CPI figures for policy clues

Jerome Powell’s testimony to the Senate Banking Committee and US inflation report are the biggest events on the calendar this week, with the former sat at the top. The US has knocked out a steady stream of weaker data since the Fed’s last meeting, and traders will get Powell’s updated view on the economy and Fed policy. And that means traders will hang on to his every word and seek any clue, however minor, to vindicate their bets that the first cut will arrive in September. Last week he estimated that CPI will fall to the mid to lower 2’s by the end of 2025, so any update to this narrative can shape expectations for the level of easing next year.

Whilst the Fed’s preferred PCE inflation reads are just 0.6 percentage points above their 1% inflation target, CPI and core CPI are 1.3 and 1.4 percentage points above it. Yet the rate of inflation is clearly slowing, the faster it can enter the upper 2’s, the stronger the case for cuts from the Fed in 2025.

John Simon, the RBA’s Head of Economic Research, speaks at the Australian Conference of Economists on Wednesday at 10:30. Given that bets of another RBA hike as soon as August are now ramping up, it will be worth a listen. Inflation has been ramping up again this year and was uncomfortably hot in the recent report, whilst retail sales and building approvals also beat expectations which only adds to the pressure for the RBA to hike to 4.6%.

The 30-day RBA cash rate futures imply a 32% chance of an August hike, down from 45% after the CPI report. The 1-month OIS has dropped back to 4.33% (below the cash rate) after a weak NFP report form the US on Friday, as a more dovish Fed takes some pressure off of the RBA to hike. And if the RBA want to look for any reasons to not hike (which I suspect they will), then weaker business sentiment data this week could help.

Business confidence contracted for the first month in five and touched a 6-month low, and conditions slipped to a -month low in May. Both metrics have been trending steadily lower in recent years, with forward orders remaining in negative territory (particularly for retail, wholesale and construction).

The RBNZ meeting on Wednesday also warrants a look, even if chances of a change in policy is next to zero. The RBNZ surprised markets by revealing that they discussed the potential to hike, whilst markets were positioned for them to strike a slightly dovish tone. They will probably retain that hawkish bias, but if they are to treat us to a more dovish tone then it removes from pressure from the RBA to consider hiking in August.

AUD/USD 20-day rolling correlation

• The positive correlation between WTI crude oil, iron ore, the AU-US 2-year yield and AUD/USD has picked up notable over the last couple of weeks
• Interestingly, it also has a strong inverted relationship with China’s CSI 300 index
• The correlation with the US dollar index (DXY) is almost non-existent at -0.2, having shared a strong inverted correlation for a few months until recently

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

• It is a case of more of the same with the COT data: Bulls continues to add to their exposure whilst bears trimmed their bets further
• Net-short exposure among large speculators fell to a 3-yeara low, and a 6-month low among asset managers
• I suspect this trend continued in the second half of the week (after the COT data was compiled) given the weak NFP report and the fact the AUD/USD closed the week at a 6-month high

AUD/USD technical analysis

I’m pleased to see that the anticipated pullback and bullish breakout worked charm. AUD/USD has now risen for four consecutive weeks, and in the past week risen for four consecutive days. The rally into the sideways range between 0.6570 – 0.6700 has now been complimented with a bullish move of greater strength. And with US data souring alongside odds of another RBA hike making an unwelcome cameo, I suspect bulls will be tempted to buy dips. 0.68 is the next upside target, with pullbacks towards 0.6700 potentially gaining further bullish interest.

Even if this level breaks, dips above the volume cluster around 0.6650 look appealing to my bullish eyes.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge