AUD/USD weekly outlook: Upside may be capped, but a cycle low could be in

Monday’s 5-year low amid tariff headlines was short-lived, with AUD/USD recovering as much as 3.5% last week
Hawkish BOJ bets and safe-haven flows into the Japanese yen has sent AUD/JPY down to a 21-week low
In the last full week before the RBA’s interest rate decision, money markets effectively see a 25bp cut as a done deal next week
US CPI and Jerome Powell’s semi-annual testimony to the House Financial Services Committee are the calendar highlights

This is the last full week before the RBA’s next interest rate decision, though I do not see any data points of significance that could change whichever route the RBA takes. Money markets continue to imply a cut is a done deal, with RBA cash rate futures pricing in a 95% chance of a 25bp cut on February 18. Bloomberg estimates a February cut at 93%, is fully priced in for April with another fully priced for May. Three cuts are expected to have arrived by August.

While a cut is favoured, I’m not convinced it really is a slam dunk given the robust employment figures and pockets of strength elsewhere. I am also doubtful of three cuts arriving by August. At the very least they may signal an April cut at their next meeting. But if they do cut next week, future cuts are likely to be decided on a ‘per meeting’ basis. We should also be vigilant for headline, in case they decide to telegraph any incoming cut via media interviews this week, particularly over the weekend (which used to be standard practice under Governor Lowe).

New Zealand accounts for the baulk of the more interesting data between the antipodean nations, with recent employment data opening the door for another 50bp cut. So, any further signs of weakness in NZ retail sales, business PMI or (most importantly) inflation expectations could seal the deal for a jumbo cut, and help AUD/NZD catch a bid.

The early hours of Thursday morning will be the highlight of the week from the calendar, with US inflation data for January released 90 minutes ahead of Jerome Powell’s testimony to the House Financial Services Committee. With that said, it is usual for Powell to release his pre-prepared remarks on the day, so this could prompt some movement for currencies late on Wednesday night. Clearly, traders will be looking for clues over policy and whether the Fed deem Trump’s trade wars to be inflationary. I expect Powell to strike a cautious tone, steering away from cuts while not igniting concerns over any hikes.

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

Net-short exposure to AUD/USD futures increased by 3.5k contracts among large speculators and 3.2k contracts among asset managers
This means net-long exposure has risen eight of the past nine weeks among large speculators
However, there seems to be a certain degree of heading going on given longs and shorts increased among both sets of traders
And despite the rise of net-bearish exposure, AUD/USD went on to form a prominent bullish reversal after reaching its lowest level since the pandemic last Monday morning, which raises the prospects of a significant swing low

AUD/USD technical analysis

The Australian dollar had fallen -12.3% from the September 30 high to Monday’s low, before closing the day with a prominent bullish pinbar. This deems the breakout to the 5-year low as a fakeout, or bear trap. Tariff headlines (good and bad) are clearly the bigger driver for AUD/USD over rate-cut bets, but then it has already been argued that AUD/USD downside could be limited given it was mostly sold throughout Q4.

We could be in for some rangebound trading, given its reluctance to test 60c and lack of a true bullish catalyst. I still think a retest of the August low at 0.6348 is possible. But unless we are treated to a dovish Fed, less-dovish-than-expected RBA or positive trade headlines, it upside potential seems likely to remain capped.

Bulls could seek dips towards the 0.6214 high-volume node (HVN) in anticipation of a move up to 63c. A break below 62c invalidates this near-term bullish bias.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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