AUD/USD weekly outlook: RBA meeting, speeches and ISM in focus

• The Australian dollar was thrown overboard again last week, as appetite for risk continued to nosedive
• A weak nonfarm payrolls report sparked fanned fears of a recession, following another weak ISM manufacturing report earlier in the week
• AUD/JPY was lower for a fourth week, with its -5.3% weekly plunge being its worst in eight years
• The Aussie was also down -3.5% against the Swiss franc as money flowed into safe-haven assets as traders ditched risk-assets such as indices, commodities and commodity currencies
• Yet despite the carnage, AUD/USD was just lower by -0.6% to suggest bears are losing steam over the near term

The RBA are very unlikely to raise their cash rate thanks to a weaker set of Q2 inflation figures. The question for Tuesday’s meeting is whether that will be enough for the RBA to remove their hawkish bias. Given the Fed are now officially dovish and risk-off has dominated, there is a reasonable chance for the RBA to do so. Whether that will make any more of a dent on AUD/USD than recent headlines already have is debatable, but it will be comforting to those sensitive to higher rates- even if the RBA are unlikely to switch to a dovish tone themselves any time soon. Take note that the RBA also release their revised economic forecasts in their quarterly SOMP (Statement on Monetary Policy). Any revisions to their inflation outlook has the grater potential to drive sentiment for AUD/USD.

Two RBA speeches also have the potential to shape sentiment for AUD/USD. Assistant governor Sarah Hunter speaks on the ‘cost of living’ to the Senate on Wednesday, where traders will listen out for clues on the RBA’s inflation outlook and approach to monetary policy. And with RBA governor Bullock also speaking at the Annual Rotary Lecture on Thursday, it provides the RBA an opportunity to fine-tune their message if the statement and SOMP are no clear enough.

The ISM services report is the key economic event next week. With CPI, PCE, NFP and ISM manufacturing reports all falling below consensus estimates, a weak ISM services report would be the icing on the cake for doomsayers and doves. Even if ISM services surprises to the upside, I doubt it would remove the uncertainty over the US economy given weak data that preceded it. A weak print could however weigh further on sentiment, and therefore AUD/USD.

AUD/USD 20-day rolling correlation

• Appetite for risk (or lack thereof) remains a key driver for AUD/USD, as concerns for a recession weigh on commodities and AUD/USD
• The CRB commodities index, copper, WTO crude oil and iron ore share a strong positive correlation of ~0.9 (1 is perfect, -1 is perfectly inverse)
• The 20-day correlation with the AU-US 2-year yield is now negative to further underscore that monetary policy expectations are no longer a key driver for AUD/USD

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

• Net-short exposure to AUD/USD futures increased for a second week among large speculators and asset managers
• Both sets of traders increased shorts and trimmed longs for a second week (although asset managers have been increasing short bets for the past four weeks)
• With no immediate sign of a sentiment extreme, AUD/USD could be looking at further downside over the coming weeks unless appetite for risk returns
• While AUD/USD closed lower for a third consecutive week, downside volatility for the week was its lowest in 12 weeks which suggests bears are running out of steam over the near term

AUD/USD technical analysis

There are two schools of thought to consider when looking at the AUD/USD chart. If appetite for risk remains on the ropes, selling pressure could make a mockery of any attempt to call for mean reversion higher on the Australian dollar. But on the other hand, AUD/USD may be due for some mean reversion higher if risk assets can find some stability. AUD/USD has closed lower for three consecutive weeks and last week’s bearish candle was the smallest range in 12 weeks. The RSI (2) also reached oversold on the weekly chart and formed a bullish divergence on the daily. The daily RSI (14) is also oversold.

Prices are hovering around 0.6500, but a dip towards 0.6450 also seems feasible, near a 78.6% Fibonacci level and May low. Should AUD/USD form a bounce, I suspect bears will be waiting for another opportunity to fade into strength and drive it down to 0.64.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge