AUD/USD weekly outlook: Make or break for AUD, CNH around key levels

• AUD/USD is currently down -0.74% on Monday following Trump’s announcement of 25% tariffs on Canada and Mexico’s imports and 10% on China’s
• The Australian dollar was lower against all major currencies apart from the Canadian dollar last week
• The USD was also the strongest currency on Friday after PCE inflation prices picked perked up, which will likely keep the Fed’s interest rates elevated for the foreseeable future
• Money markets suggest a 95% chance that the RBA will cut the cash rate by -25bp this month, after trimmed mean inflation came in softer than expected at 3.2% y/y (3.3% forecast) and 0.5% q/q (0.6% forecast)

The week kicks off domestically with monthly and quarterly retail sales. Black Friday sales helped boost November’s figures, which could run the risk of a disappointing December release – assuming Christmas shopping arrived early again this year. Some forecasts estimate a -0.7% decline in December, which could see the Aussie face further selling pressure. And with Q3 crawling along at 0.5% q/q, another soft print would play into the hands of RBA doves.

We have several Fed members speaking this week ahead of Friday’s Nonfarms payroll report, although it is difficult to expect anything particularly dovish given Trump’s tariffs and stronger inflation. And it is also reasonable to expect another decent set of employment figures. This should keep the USD bid and the yuan under pressure, which likely translates to a lower AUD/USD.

With AUD/USD getting caught in the crosswinds of Trump’s tariffs, headline risks remain in place for the Aussie and commodity currencies in general. Trump has warned that further tariffs for Canada are on the horizon.

The ISM non-manufacturing report also warrants a look to see if the ‘prices paid’ component has continued to accelerate. Last month it rose to a near 2-year high to show inflationary pressures are indeed rising, even before Trump returned to the Whitehouse.

AUD/USD correlations:

AUD/USD futures – market positioning from the COT report:

• Only very minor adjustments were made last week to net-short exposure, with large speculators decreasing theirs by -535 contracts and asset managers increasing theirs by 141 contracts
• Both sets of traders remain heavily net short, but not at a sentiment extreme
• This leaves further downside potential for the Aussie in the coming weeks

AUD/USD technical analysis

As USD/CNH and AUD/USD share a strong, inverted correlation, both should be tracked in tandem to decipher potential moves for the Aussie. USD/CNH mostly held above the high-volume node (HVN) mentioned two weeks ago, and has since performed a solid bounce while AUD/USD turned lower. All eyes are now on thew 2020 high, as a break above it suggests AUD/USD could fall to its lowest level since 2020. However, it also seems likely that the level will hold initially as such key levels rarely break immediately.

AUD/USD closed lower for a 6^th consecutive day, a bearish sequence not seen since July. Prices held currently holding above the 2020 monthly-close low and the daily RSI (2) is heavily oversold. But with the overall trend, momentum and expected monetary policies of the RBA and Fed working against bulls, a break of the January low seems inevitable. Which means bears may be tempted to fade into bounces, however small, in anticipation of a move down to 60c. And a break above the 2022 high on USD/CNH could make that happen sooner than later.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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