The recent selloff in the Australian dollar (AUD) has taken the AUDUSD currency pair to its weakest level in two-and-a-half years. Over the past few trading days, however, the Aussie appears to have stabilized, finding support above 90 cents.
While other currencies extended their slides after the Federal Reserve signaled that it is getting ready to taper asset purchases, the Australian dollar nudged only slightly lower because the currency was already deeply oversold before the Federal Open Market Committee (FOMC) meeting.
Still, this is a “make or break” kind of week, and the AUD could break 90 cents or squeeze higher. According to the latest CFTC IMM report released on June 28, short AUDUSD positions are still near record highs. If this week's event risks give speculators any reason to take profit or reconsider their short positions, the liquidation could drive the AUDUSD above 92, and most likely 93 cents.
There are three main focal points this week for Australian dollar traders: 1) Chinese data; 2) the FOMC meeting minutes due out on Wednesday; and 3) Australian data.
We spend a lot of time talking about the US dollar and Fed policy, so here, we'll primarily focus on how Chinese and Australian data could affect the Aussie.
Recent economic data shows that the Chinese economy is slowing and the government is coming to terms with the fact that previous growth rates cannot be sustained. This week, the focus will be on Chinese inflation and trade numbers. Economists are still looking for stronger trade activity for China and a nice increase in exports and imports. If the data meets or beats expectations, Monday's AUDUSD bounce could turn into a stronger recovery.
However, if export growth slows, or even worse, declines, which we feel is more likely, the AUD could be in big trouble with 90 cents potentially coming under fire.
From Australia, business and consumer confidence numbers are scheduled for release, but the most important data will be the employment report. Economists are not looking for any major changes in job growth, but the unemployment rate is expected to tick higher, which could renew the selloff in the currency.
While the odds favor further losses in the Australian dollar, based on the PMI reports, there is room for an upside surprise, so we still can't rule out the possibility of a short squeeze that could drive AUDUSD higher. The pair could move either way, which is precisely why this could prove to be a make or break week for the Australian dollar.
The Most Important Factors Weighing on the Euro
The improvement in risk appetite helped lift the euro (EUR) against the US dollar (USD) on Monday despite softer-than-expected Eurozone data. German current account, trade, and industrial production figures all missed expectations, but the impact on the single currency was nominal.
The deterioration in economic data may validate the dovish monetary policies from the European Central Bank (ECB), but after selling off for two consecutive days, the euro shrugged off the bad news, focusing instead on the resolution to Portugal's political crisis and the approval of the EUR 3 billion aid payment to Greece.
See related: Another Debt Crisis Narrowly Averted
As our colleague Boris Schlossberg pointed out Monday morning, the spread between ten-year US Treasury and German bund yields hit a seven-year high last week. Given this spread and the recent performance of the EURUSD, the charts suggest that the pair should be trading much lower.
Shorter-term charts tell us that the April low of 1.2746 is near-term support, but the monthly chart shows potential for a move as low as 1.2050. Of course, there's a long way to go before that level is reached, and the pair will most likely pause at 1.25, but the technical structure does still point to further losses once the EURUSD drops below 1.2746.
See also: The Critical EUR/USD Factor to Watch
By Kathy Lien of BK Asset Management