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Australian Dollar Talking Points

AUD/USD pares the decline from earlier this week as the U.S. Non-Farm Payrolls (NFP) report disappoints, and the exchange rate may continue to consolidate over the coming days as it fails to extend the recent series of lower highs & lows.

Image of daily change for major currencies

AUD/USD Rate Vulnerable to Slowing China Consumer Price Index (CPI)

Image of daily change for audusd rate

AUD/USD holds above the weekly-low (0.7191) as the NFP report shows a 155K expansion in November versus projections for a 198K print, with Average Hourly Earnings holding steady at 3.1% per annum for the second consecutive month.

The lackluster data prints may push the Federal Open Market Committee (FOMC) to deliver a dovish rate-hike later this month especially as Fed Vice-Chairman Richard Clarida warns that ‘we are in a world where central banks, including the Fed, are focused on keeping inflation away from disinflation, and Chairman Jerome Powell & Co. may continue to soften their hawkish tone over the coming months as the central bank shows a greater willingness to tolerate above-target inflation over the policy horizon.

In turn, waning expectations for an extended hiking-cycle may produce headwinds for the greenback, but the diverging paths for monetary policy continues to cast a long-term bearish outlook for AUD/USD especially as the Reserve Bank of Australia (RBA) keeps the door open to further support the economy.

Image of DailyFX economic calendar

As a result, data prints coming out of China, Australia’s largest trading partner, may shake up AUD/USD as the region faces its slowest economic expansion since 2009, with the Consumer Price Index (CPI) expected to narrow to 2.4% from 2.5% in October. Moreover, the lingering threat of a U.S.-China trade war is likely to keep the RBA on the sidelines as it dampens the economic outlook for the Asia/Pacific region, and the central bank may continue to tame bets for higher borrowing-costs as ‘the low level of interest rates is continuing to support the Australian economy.

Keep in mind, Governor Philip Lowe & Co. also appear to be bracing for a further depreciation in the local currency as official note ‘a broad-based appreciation of the US dollar this year,’ and the RBA’s wait-and-see approach may continue to produce headwinds for the Australian dollar as the floating exchange rate ‘remains an important shock absorber for the Australian economy.

With said, AUD/USD remains at risk of giving back the advance from the 2018-low (0.7021) as the RBA remains in no rush to lift the official cash rate (OCR) off of the record-low, but retail traders continue to fade the weakness in the exchange rate as the pickup in volatility fuels a rebound in market participation.

Image of IG client sentiment for audusd

The IG Client Sentiment Report shows 67.2% of traders are still long AUD/USD compared to 69.1% yesterday, with the ratio of traders long to short at 2.04 to 1.The number of traders net-long is 3.0% higher than yesterday and 18.3% higher from last week, while the number of traders net-short is 3.8% higher than yesterday and 30.5% lower from last week.

Profit-taking behavior may account for the drop in net-short position amid the pullback from the monthly-high (0.7393), but the skew in retail position offers a contrarian view to crowd sentiment as both price and the Relative Strength Index (RSI) now snap the bullish formations carried over from October. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups.

AUD/USD Daily Chart

Image of audusd daily chart
  • The opening range for December raises the risk for a further decline in AUD/USD as price and the Relative Strength Index (RSI) snap the bullish formations from October, with the 0.7170 (23.6% expansion) to 0.7180 (61.8% retracement) region on the radar.
  • A break/close below the stated region raises the risk for a move towards0.7090 (78.6% retracement) to 0.7110 (78.6% retracement), with the next downside hurdle coming in around 0.7020 (50% expansion), which lines up with the 2018-low (0.7021).

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.