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AUD/USD Rebound Takes Shape Ahead of Australia Employment Report


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AUSTRALIAN DOLLAR TALKING POINTS

AUD/USD carves a series of higher highs and lows as it extends the rebound from the yearly low (0.6829), and fresh data prints coming out of Australia may fuel a larger advance in the exchange rate as employment is expected to increase for six consecutive months

AUD/USD REBOUND TAKES SHAPE AHEAD OF AUSTRALIA EMPLOYMENT REPORT

AUD/USD seems to have reversed course ahead of the June 2020 low (0.6648) amid recovery in global benchmark equity indices, with the exchange rate trading to a fresh weekly high (0.7041) as the Reserve Bank of Australia (RBA) Minutes reveals that “timely evidence from liaison and business surveys indicated that labour costs were rising in a tight labour market and a further pick-up was likely over the period ahead.

As a result, the RBA insists that “that further increases in interest rates would likely be required to ensure that inflation in Australia returns to the target over time,” and the update to Australia’s Employment report may generate a bullish reaction in AUD/USD as the economy is anticipated to add 30.0K jobs in April.

Image of DailyFX Economic Calendar for Australia

At the same time, the Unemployment Rate is seen narrowing to 3.9% from 4.0% during the same period, and the ongoing improvement in the labor market may encourage the RBA to deliver a series of rate hikes over the coming months as the central bank acknowledges that “there is no contemporary experience as to how labour costs and prices in Australia would behave at an unemployment rate below 4 per cent.

In turn, AUD/USD may stage a larger recovery ahead of the next RBA meeting on June 7 as Governor Philip Lowe and Co. prepare Australian households and businesses for higher interest rates, and a further advance in the exchange rate may alleviate the tilt in retail sentiment like the behavior seen earlier this year.

Image of IG Client Sentiment for AUD/USD rate

The IG Client Sentiment report shows 66.17% of traders are currently net-long AUD/USD, with the ratio of traders long to short standing at 1.96 to 1.

The number of traders net-long is 6.18% lower than yesterday and 15.62% lower from last week, while the number of traders net-short is 12.24% higher than yesterday and 26.92% higher from last week. The decline in net-long position comes as AUD/USD climbs to a fresh weekly high (0.7041), while the jump in net-short interest has helped to alleviate the crowding behavior as 74.02% of traders were net-long the pair last week.

With that said, another uptick in Australia Employment may fuel the recent series of higher highs and lows in AUD/USD as it fuels speculation for another RBA rate hike, but the rebound from the yearly low (0.6829) may turn out to be a correction in the broader trend with the Federal Reserve on track to normalize monetary policy at a faster pace.

AUD/USD RATE DAILY CHART

Image of AUD/USD rate daily chart

Source: Trading View

  • Keep in mind, AUD/USD took out the July 2020 low (0.6877) after snapping the opening range for May, but the exchange rate appears to have reversed course June 2020 low (0.6648) as the recent rebound in price pulls the Relative Strength Index (RSI) out of oversold territory.
  • AUD/USD carves a series of higher highs and lows amid the lack of momentum to break/close below the Fibonacci overlap around 0.6770 (38.2% expansion) to 0.6820 (50% retracement), with the move above the 0.6940 (78.6% expansion) area bringing the 0.7070 (61.8% expansion) to 0.7090 (78.6% retracement) region on the radar.
  • Next area of interest comes in around 0.7130 (61.8% retracement) to 0.7180 (61.8% retracement) followed by the 0.7260 (38.2% expansion) region, which largely lines up with the 200-Day SMA (0.7265).

Follow me on Twitter at @DavidJSong

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES

David Song, Currency Strategist, Daily FX
May 18, 2022

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AUD/USD Outlook Ahead of Australian Election, Jobs Data, NATO Risks.

AUD/USD Outlook Ahead of Australian Election, Jobs Data, NATO Risks

AUSTRALIAN DOLLAR, AUD/USD ANALYSIS, UKRAINE WAR, NATO, COVID-19 - TALKING POINTS

  • AUD/USD price oscillations likely to rise on macro-fundamental risks in Asia, Europe
  • Australian election, jobs report may inflame Aussie volatility after weak Chinese data
  • NATO courtship with Sweden, Finland could raise concerns about a Russian response

AUD/USD volatility may rise in the week ahead, with the Australian election and key employment data due. These will be critical to monitor, especially after the publication of weak data out of China – Australia’s largest trading partner – earlier this week. Concern about the impact of local COVID-19 measures on economic activity could send a chilling effect beyond Australia, potentially cooling appetite for risky assets.

Escalating tension over the Ukraine war and the likely admission of Sweden and Finland into the North Atlantic Treaty Organization (NATO) could amplify bearish shockwaves. Demand for liquidity could push the US Dollar higher while simultaneously putting pressure on the Australian Dollar and reinforcing the pair’s spectacular decline.

 

UKRAINE WAR UPDATE

In light of the war in Ukraine, Sweden and Finland have both confirmed that they will apply for NATO membership. Russia has balked at such a prospect and warned that it would deploy nuclear weapons in the Baltic Sea if either country joined. However, all 30 members need to approve in order for any new entrants to join the military alliance – and one participant is holding out.

Turkey’s President Recep Tayyip Erdoğan accused the two Nordic states of harboring Kurdish militants with unsavory goals towards his country. Internal deliberations could thus stall negotiations, potentially stalling the markets’ reckoning with political risk posed by Sweden and Finland’s NATO admission.

For more updates on geopolitical risks, follow me on Twitter @ZabelinDimitri.

If Russia follows through with its threats – and recent sovereignty-violating adventurism suggests they will – then US Dollar demand may rise amid a bout of risk aversion. Having said that, Mr. Putin has softened his language in this area, potentially obscuring the true level of threat in play. One caveat though was a warning against increased militarization, which may yet provoke a response from the “Russian bear”.

AUSTRALIAN ELECTION

Australians will vote for a new government on Saturday, potentially putting Scott Morrison’s conservative government out to pasture after it enjoyed a nine-year reign. The center-left Labor party led by Anthony Albanese is slightly ahead in the polls after Mr. Morrison launched his campaign just under a week before voters go to the ballot box.

While the polls do indicate a sense of preference in the electorate, traders may remain cautious. A process known as “herding” – where pollsters shade results to match those of others to reduce potential credibility damage in a scenario where just one survey is seen as “wrong” – could skew the perceived probability of a Labor victory. The latest figures have the Australian Liberal Party at 32.7%, and the Australian Labor Party (ALP) at 35.7%, as of May 17.

Cost of living considerations amid soaring inflation and national defense – especially in light of a more aggressive China – are the top issues for the public. Price growth is at a multi-decade high. Housing affordability may be a particularly big issue. Interest rates are on the rise and the two leading parties have offered competing remedies. The candidates' fiscal proposals may prove critical for the Australian Dollar against this backdrop.

AUSTRALIAN JOBS DATA

Australian jobs data is likely to be an important indicator crossing the wires this week, with economists expecting 30k jobs to be added for the month of April. The participation rate is anticipated to remain unchanged at 66.4%, while the unemployment rate is predicted to come in at 3.9%. That would be slightly lower than the prior month’s 4% figure. How might this impact RBA monetary policy after the May meeting?

The central bank’s latest 25-basis-point rate hike and the gloomy presentiment of “starting the process of normalizing monetary conditions” is part of a broader trend of global tightening amid record inflation. With wage growth fanning the flames, the jobs report may be crucial for the Aussie’s price trend. If they reflect a tightening labor market, that may give the RBA impetus to hike rates more aggressively.

Having said that, there is a caveat. If Chinese data continues to weaken on the back of anti-Covid lockdown measures, it could send a chill down the Australian economy’s spine. Consequently, the RBA may soften its rhetoric and put the Aussie on the defensiveeven as it still intends on raising rates.

READ MORE: How to Trade the Impact of Politics on Global Financial Markets

AUD/USD TECHNICAL ANALYSIS

The Australian Dollar has fallen over 10 percent against the Greenback since April 5, and recently touched a two and a half year low at 0.6829. The pair may be in the early stages of a recovery, though a resistance band between 0.7097 and 0.7119 could keep AUD/USD’s ascent in check. How it confronts this multi-layered obstacle may be telling of what is to come, and how traders will position themselves.

AUD/USD - DAILY CHART

AUD/USD Outlook Ahead of Australian Election, Jobs Data, NATO Risks

AUD/USD chart created using TradingView

A feeble retreat may reinforce a bearish outlook and keep AUD/USD suppressed until sentiment reverses. Conversely, breaking resistance could give a glimmer of hope to bulls who are hoping to break out of the pen. If the pair manages to surmount the ceiling, the next obstacle to clear could be former formidable resistance at 0.7253, where the pair previously stalled before aggressively capitulating.

 

May 18, 2022 | DailyFX
Dimitri Zabelin, Analyst

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(UPDATE)
Australian dollar steady after jobs data amid risk off sentiment


The Australian dollar was steady after jobs data was largely inline; today’s data is against a backdrop of a strong domestic economic outlook and the RBA are validated for raising rates. Will more hikes boost AUD/USD?

1652934277764.png
Source: Bloomberg
 
 

The Australian dollar held its ground after the April unemployment rate came in at 3.9% as forecast and against 4.0% previously. This is the lowest Australian unemployment rate since the 1970s. The overall change in employment for the month was 4k instead of 30k anticipated. Full time employment increased a whopping 92k, while part time jobs decreased 88k.

With uncomfortably high inflation, today’s number opens the way for the RBA to continue to hike rates and potentially accelerate the lifting cycle to rein in loose policy. However, domestic factors appear to be sidelined for the exchange rate for now. The Aussie was pummelled overnight in a classic risk off trading environment after the reality of steep monetary tightening globally became apparent to a seemingly complacent equity market.

When it comes to growth versus inflation, central banks have erred on the side of fostering growth at the expense of living with high inflation. This is born out of the 1970-80s period of high inflation. At that time, US Federal Reserve Chair Paul Volker got the backing of two successive administrations, from both sides of the aisle, to get inflation under control. He did so through several highly restrictive policies. One of these was a move to very high interest rates.

The cost of this policy was two severe recessions in the 1980s. The market appears to have woken up to this stark reality for the current situation. Cheap money of this era is being consigned to history at a rapid rate of knots. With central banks focused on fighting inflation, risk assets that rely on cheap funding now have their business models questioned. As an example, special purpose acquisition companies (SPAC), once the darlings of the recent free-money environment, are facing difficulties raising cash - if they can at all.

More concerning has been the recent disappointing reporting results from real economy companies in the US. This backdrop leads to growth linked currencies like the Aussie coming under pressure, while perceived safe-haven currencies like the US dollar, Japanese yen and Swiss franc attract inflows.

Movements in the USD (DXY) index seems to be driving AUD/USD for now.

1652934467183.png
Source: TradingView


This information has been prepared by DailyFX, the partner site of IG offering leading forex news and analysis. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

Daniel McCarthy | Strategist
19 May 2022

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