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AUD/USD Squares Off As RBA & FOMC Kick Off May

AUD/USD Squares Off As RBA & FOMC Kick Off May

2017-05-01 21:00:00
Tyler Yell, CMT, Currency Strategist
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Will AUD buck the commodity FX downtrend? To find out, see our forecast!

Talking Points:

  • DXY starts month of May with tier-1 data in attempt to buck trend
  • AUD/USD worth watching as 1m 25D risk-reversals push higher ahead of RBA
  • CFTC CoT shows short covering in rates ahead of FOMC, Jobs report

Join Tyler in his Daily Closing Bell webinars at 3 pm ET to discuss market developments.

Monday provided a quiet start to a week that is not expected to remain quiet. Monday night in the US will provide RBA rate announcement. We could be seeing the start of support for AUD. Depending on the tone from Governor Lowe, we could see strength in AUD against haven currencies and other weaker commodity currencies like NZD. In grabbing insight from the options market, AUD 1-month risk reversals (out-of-the-money or OTM calls relative to OTMputs) traded to their highest level in six weeks showing traders are less worried about the downside than anytime in six weeks. We saw a similar development in the EUR before it moved to 1.09.

The USD will have to work to get out of its rut. The Citi Economic Surprise Index recently showed a negative reading for the US. Such a reading indicates persistent disappointments in the data relative to economist expectations. Wednesday’s FOMC and Friday’s NFP will look to push the Economic Surprise Index back above zero after a disappointing start to the week with US ISM Manufacturing (APR) missing expectations of 56.5 with a reading of 54.48.

Another note that should be kept on trader’s screens this week is to keep tabs on the JPY. May 3-5 will represent Golden Week in Japan, which will leave Japanese markets closed and likely driven by external factors such as risk sentiment. Despite US underperformance, multiple global indices are at all-time highs, and the sentiment picture from IG Client positioning is showing an inflection worth watching. IG Client positioning is showing trading fighting the spike in JPY crosses, which from a contrarian perspective could favor a continuation of JPY weakness. For USD/JPY, many traders are watching a daily close above 112 and ~123 on EUR/JPY. A breakout there could see a run higher in JPY crosses.

Interested in seeing what IG client’s positioning means for the JPY? Find out here!

Closing Bell’s Top Chart: May 1, 2017, as tier-1 US Economic events await, USD/JPY test resistance

AUD/USD Squares Off As RBA & FOMC Kick Off May

Tomorrow’s Main Event:Reserve Bank of Australia Rate Decision (MAY 02)

Few expect drastic changes in the policy outlook from the RBA when the speak Tuesday morning. However, the market is letting of its downside bias for AUD when looking at the options action. Traders are likely to watch for slight adjustments to their forecasts to see if optimistic language is employed. If so, we could see AUD continue Monday’s move higher.

IG Trader Sentiment Highlight: Haven currencies may continue to sell off

AUD/USD Squares Off As RBA & FOMC Kick Off May

EURCHF: As of May 1, IG retail trader data shows 47.5% of traders are net-long with the ratio of traders short to long at 1.1 to 1. The number of traders net-long is 3.8% lower than yesterday and 18.9% lower from last week, while the number of traders net-short is 4.9% higher than yesterday and 80.9% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURCHF prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EURCHF-bullish contrarian trading bias.(Emphasis Mine)

While EUR/CHF is not a hotly watched pair, it is a helpful proxy for sentiment. As a haven currency, a strong CHF tends to show risk-off undertones. Conversely, a weakening CHF shows that risk could be bid in the days or weeks ahead, which sentiment may be in the process of highlighting.

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Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com

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

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