AUD/USD Forecast: Scope For Technical Correction?

AUD/USD shed 0.38 percent last week as it ended at 0.7643. The highlight of the last week was the dismal Aussie retail sales data, which squashed the already low odds of the RBA tightening.

For the second week, the downside in the pair was capped by the weekly 50-MA (moving average). Still, the rebound has been anything but encouraging, courtesy of a sharp drop in the 10Y Aussie-US yield spread.

Macro data/events to watch out for this week

Tuesday - 03:30 GMT - RBA rate decision - A Reuters poll of economists shows the Reserve Bank of Australia (RBA) is set to hold the cash rate unchanged at 1.5 percent. Traders will be interested to see what the RBA has to say about the recent bout of weakness in the inflation and retail sales.

Also, despite the tightening labor market, the strong uptick in wage growth remains elusive. This is a global phenomena, and not Australia specific. Still, it is a cause of concern for the RBA. So will the RBA sound more cautious/pessimistic?

The central bank is likely to avoid being too negative and shall retain the cautious tone - “slow growth in real wages and high levels of household debt are likely to constrain growth in household spending”.

Wednesday - 02:00 GMT- Trade balance - Devil is in the details. Uptick in commodity imports (iron ore, copper) could strengthen the bid tone around the AUD. 

Thursday - 01:30 GMT - China PPI and CPI release - An uptick in the Chinese PPI would put reflation trade back on the investors' radar.  

Friday - 00:30 GMT - RBA monetary policy statement - The central bank will release its updated economic forecasts. The inflation projections could be revised slightly lower.

The US data docket is thin this week...

Impact on the AUD/USD

AUD may run into another wave of offers if-

• Tuesday's RBA statement sounds more pessimistic than it did in Oct.
• Thursday's Chinese PPI ticks higher (reflation story). The Chinese reflation story is likely to strengthen the USD first, given the Aussie data releases have missed estimates of late. Still, the AUD could rally against other majors - EUR, GBP and NZD.
• RBA surprises market with a bigger cut in inflation forecasts on Friday.

Technical correction likely

As noted earlier, for two weeks, the bears have failed to cut through the support of the weekly 50-MA. Despite the dismal Aussie retail sales print, the AUD/USD remains above the weekly 50-MA. It shows the markets may be done pricing-in the delay in the RBA tightening. Thus, a technical correction could gather pace if the Aussie data/RBA events match estimates and the 10-year treasury yields falls below 2.3 percent.

Daily chart

The above chart shows-

• Falling channel on price and RSI.
• Bears struggling to pierce the support offered by the trendline sloping upward from the May 9 low and June 2 low.
• 0.7696 - the confluence of the 200-day MA and head and shoulders neckline.

Weekly chart

The above chart shows-

• Sell-off running out of steam near strong support - 0.7630 (38.2 percent Fib R of Jan 2016 low - Sep 2017 high), 0.7633 (61.8 percent Fib R of May low - Sep high), 0.7642 (weekly 50-MA).
• The 5-DMA and the 10-DMA sliding, show negative bias, although sell-off looks overstretched, given the gap between the price and the 10-MA.
• The 50-MA still sloping upward.

• A corrective rally to 0.7734-0.7780 levels could be seen, although further gains are ruled out, given the falling yield spread and the downward sloping 5-MA (0.7734).
• On the downside, the area around 0.7550-0.7530 could be put to test if the RBA sounds more dovish and the downward revision of the inflation forecasts is bigger than expected.