AUD/USD support dependent on USD/CNH resistance, ASX set to bounce?

US inflation data came in as expected, with core CPI rising 2.7% y/y and 0.3% m/m. This is not likely enough to derail a Fed cut next week, although the consensus remains for them to pause in January. But it was enough to send the US dollar higher for a fourth day and let USD/JPY reach a 2-week high.

The Nasdaq 100 reached a record high thanks to gains from Nvidia, Alphabet and tesla. The S&P 500 snapped a 2-day pullback with futures less than a day’s average range beneath its own record high. Yet Dow Jones futures were lower for a fifth day, and it is the mixed performance on Wall Street which means gains on the ASX 200 may be capped (even though it looks set for a bounce).  

The Bank of Canada cut rates by 50bp to 3.25% and, as I suspected, signalled a potential pause next year. Citing a “substantially” lower cash rate, 2% inflation and an “economy in excess supply”, the BOC have now switched back to making cash rate decisions on a per-meeting basis.

Beijing announced that they’re considering more yuan weakness to tackle threats of Trump’s tariff risks. Although I'm not sure they really needed to announce it, as they’re seemingly already letting their currency slide. China recently said that nobody wins in a race to the bottom, but that doesn't mean they're not prepared to play along. USD/CNH initially rose 0.7% from Wednesday’s low which saw AUD/USD touch a fresh 13-moth low. With AUD/USD tracking yuan weakness very closely, a higher USD/CNH translates to a lower Australian dollar.

AUD/USD, USD/CNH technical analysis:

A bullish engulfing day formed on USD/CNH, thanks to Beijing’s comments on the yuan and a stronger US dollar. While this saw AUD/USD invalidate its 2022 trendline, it looks like it wants to trade back above it. We also saw a daily close back above the April and August lows with a doji, While this suggests prices may try to bounce, we also need to factor in a higher USD/CNH which could keep AUD/USD under pressure if it makes a move for the 7.3 highs, a break above which could send AUD/USD materially lower. Keep in mind AU jobs figures are released shortly, which could support the Aussie to a degree - as they have a tendency to surprise to the upside. But traders do need to keep an eye on the yuan, because if Beijing let it slide then it could drag AUD/USD lower with it.

ASX 200 (SPI 200 future) technical analysis:

It has been over a week since the pullback from its record high, and the ASX is now looking to hold above the weekly VPOC (volume point of control) and monthly pivot point. With two out of the three Wall Street indices are showing strength, the ASX could extend its bounce.

Just keep in mind that Santa’s rally tends to kick into gear from around the 20^th of the month, and that leaves room for choppy trade beforehand. For now, bulls could seek dips within the overnight range and target last week’s VAL (value area low at 8462) or the weekly VPOC (8487).

Economic events in focus (AEDT)

Weak Q3 growth figures paved the way for RBA’s dovish hold earlier this week, and cemented market pricing views of three rate cuts to be delivered in 2025. Even a slightly softer employment report could bolster those bets and bring expectations of the first cut from April to Q1. Unemployment is expected to tick higher to 4.2% from 4.1%, 26k jobs are forecast to be added (up from 15.9k) and the participation rate to remain at a record high of 67.1%. But a word of warnings: Australia’s employment figures have a tendency to surprise to the upside as opposed to the downside, so we may need to see a higher unemployment rate alongside lower participation at a minimum (and preferably and employment change miss) for a heavily sold AUD/USD to head for 63c.

• 08:45 – NZ retail sales
• 09:15 – RBA Assistant Governor Jones speaks
• 10:50 – JP foreigner bond, stock purchases
• 11:30 – AU employment

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge