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Australian Dollar Forecast: Further AUD/USD Upside Facing Hurdles

Australian Dollar Forecast: Further AUD/USD Upside Facing Hurdles

Justin McQueen, Strategist

Australian Dollar Analysis and Talking Points

  • AUD Shrugs Off Covid Concerns and Weak Chinese Data
  • USD Leg the Main Driver of the Pair
  • Example a Classic NFP Reaction

AUD Shrugging Off Covid and China Concerns

An extension of the Powell inspired drop in the greenback continues to provide a lift for AUD/USD, which has interestingly shrugged off the poor Chinese data overnight as well as the continued rise in Covid cases. Given the latter, the capital of Australia, Canberra, has extended lockdown measures until September 17th. That being said, with notable US data points to be released this week, in the form of ISM and NFP, the pair is likely to take its cue from the USD leg.

Australian Covid Cases Hitting Record Levels

Australian Dollar Forecast: Further AUD/USD Upside Facing Hurdles

Source: WHO

Still expecting downside in AUD

Despite the recent pick up in AUD/USD, I am still expecting downside in the pair for several reasons.

  1. The Fed taper nears, although, when the announcement happens is conditional on this week’s NFP report. A strong report raises expectations of a September announcement, leading to softer AUD/USD.
  2. The RBA is expected to reverse its decision to cut the pace of asset purchases and maintain A$5bln/week pace amid the deteriorating Covid backdrop as cases hit record levels.
  3. Chinese data continues to weaken as evidenced by the latest PMI figures.

That being said, with risk sentiment remaining firm as the S&P 500 and Nasdaq 100 hits a fresh record, pullbacks in the pair have been limited. Another factor to consider for today’s session is the fact that today is month-end and given the MTD gains in SPX (3%), the USD may come under pressure heading into the London 4pm fix.

AUD/USD Technical Levels

Australian Dollar Forecast: Further AUD/USD Upside Facing Hurdles

Source: Refintiiv

AUD/USD Back into Consolidation Zone

Taking a look at the chart, the AUD is back to its prior consolidation zone and with resistance situated at 0.7385 and 0.7400, this is likely to see upside capped. While on the downside, near term support comes in at the 0.7300 handle.

AUD/USD Chart: Daily Time Frame

Australian Dollar Forecast: Further AUD/USD Upside Facing Hurdles

Source: Refinitiv

A Classic Case of Trading NFP

With a lot of attention on the NFP figure once again, I thought I’d take a look at last month’s release, which had been a textbook case of how NFP is traded. Heading into the release the ADP report had significantly missed expectations (330k vs 695k exp.), which in turn, lowered the bar for the NFP report to surprise on the upside. Couple this with surprisingly hawkish comments from Vice Chair Clarida, this had heightened the market sensitivity to the NFP report.

That being said, when laying out the scenario’s, my view had been that should we see a strong headline and details, the USD would be expected to perform well vs CHF and NZD. Upon the release of the NFP report, which had been a very strong reading, NZD/USD immediately blipped lower, before retracing back to pre-announced levels, until where the dust settled and NZD/USD began to drift lower. As such, it is worth highlighting that the immediate blip lower is likely caused by algos/HFTs, therefore, jumping on this move would likely result in a poor entry. In turn, as a retail trader with higher latency, it is best to wait for the dust to settle.

NZD/USD Trading During NFP

Australian Dollar Forecast: Further AUD/USD Upside Facing Hurdles

Source: Refinitiv

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