AUD/USD Q4 2024 Outlook
Key points for the AUD/USD in H2, 2024
- The RBA are unlikely to change their cash rate this year
- Yet AUD/USD could be supported by narrowing RBA-Fed spread as the Fed continue to cut rates
- Seasonality tends to favour AUD/USD gains for each month in Q4
- The US elections could have a greater impact on AUD/USD if Trump leads in the polls or wins
It could be another quiet quarter for the RBA
There was some excitement in Q3 that the RBA may be forced to cut rates, which saw some banks estimate a November cut. I maintained my stance that the RBA were unlikely to change rates in any direction this year, and see no reason to change it now.
Inflation remains "too high" for the RBA’s liking and employment figures remain defiantly strong overall. That makes it nearly impossible for the RBA to cut rates any time soon. But that hasn’t prevented markets from pricing cuts in. RBA cash rate futures have fully priced in four 25bp cuts by August, the first of which is assumed to be in February (their first meeting of the year).
For RBA doves to stand any chance of being proven right, incoming data in Q4 needs to deteriorate. And quickly. RBA cash rate futures have fully priced in four 25bp cuts by August, the first of which is assumed to be in February (their RBA’s first meeting of the year).
- RBA meeting dates in Q3:
- RBA: November 5th
- Fed: November 7th
- RBA: December 10th
- Fed: December 18th
The Federal Reserve has implemented its first 50 basis point cut since the pandemic and is projected to reduce rates by another 25 basis points in both November and December. If the Reserve Bank of Australia holds its rates steady, this could narrow the RBA-Fed spread to its smallest margin since June 2022. This scenario is likely to benefit the AUD/USD currency pair, provided there is no recession in either the US or Australia—a situation that currently seems unlikely. Consequently, we recommend buying AUD/USD on dips, with the comfort that seasonality tends to benefit the Aussie in Q4.
What impact could the US election have on AUD/USD?
At the beginning of Q3, it looked almost certain that Donald Trump would be returning to the White House. That gave a boost for risk and increased hopes of a dovish Fed, but also fanned fears of another global trade war alongside the geopolitical concerns of a dismantled NATO. While his Whitehouse return now appears a lot less certain, AUD/USD traders should still monitor voter polls and political commentary to assess the likelihood for it to happen as we head towards the US election in early November.
We suspect a second Trump Presidency will likely be a volatile affair for risk in general. Yet the direction for AUD/USD could be trickier to ascertain given the competing narratives Trump might campaign on. Perhaps an easier way to look at this is that a Harris Presidency is perceived to have much less of an impact on global markets, which means the election and its aftermath will become less of a potential driver for AUD/USD if she remains favourite to win.
AUD/USD monthly seasonality patterns of the past 43 years:
Data over the past 43 years shows that AUD/USD has averaged positive returns in October, November and December. All three months have also delivered positive returns over 50% of the time, of which November delivered the strongest average return of 0.43% with a win rate of 58.1%. December has a slightly lower average return of 0.38% with a win rate of 51.2%.
Of course, these statistics are not a roadmap to the future and simply look at the average performance of the past. Past performance is not indicative of future results.
AUD/USD futures positioning from the commitment of traders (COT) report:
Net-short exposure to AUD/USD futures is near some of its least bearish levels since June 2021, although both asset managers and large speculators are net short by around -26k contracts combined. It is possible we might see traders flip to net-long exposure in Q4, given the Fed’s dovish path and potential for the RBA-Fed interest rate spread to narrow further. Yet a key ingredient is currently lacking for a sustainable bullish breakout: increasing volumes among speculators.
And this is where it becomes nuanced. Overall open interest for AUD/USD futures is on the rise. However, speculative volumes among large speculators and asset managers diminished in Q3. A drop in gross-short exposure shows that most of the Aussie’s recent rally can be attributed to short covering. Yet gross-longs have also been in decline, which means that speculators have effectively de-risked against the Aussie. And that does not exactly scream “risk on”.
Ultimately, a sustainable bullish breakout on AUD/USD really needs to be accompanied by a rise in gross-long alongside a reduction of gross shorts to deem it a truly bullish move. Failure to do so suggests speculators are wary that it can hold on to gains.
AUD/USD technical analysis
The quarterly high-to-low range on AUD/USD has been trending lower since Q2 2024, although Q3 volatility increased to rise just above its one-year average of 7.3%. AUD/USD has also spent the majority of its time within the 64c to 69c range over this period, but there are clues that it is trying to break higher.
Each dip towards the 2009 weekly and monthly close lows has been short-lived. A bullish piercing pattern also formed on the quarterly candles in 2022, and a bullish engulfing quarter formed in Q3 2023. A recent surge of momentum on the weekly chart also appears to be constructive for bulls.
AUD/USD saw a significant V-bottom low in 2020 followed by a strong bullish rally. As price action appears to be corrective since the 2021 high, I suspect momentum is now realigning itself with the bullish rally from the V-bottom. Three higher lows have formed since 2022, and more recently we have seen a higher high break the sequence of lower highs. Also, note the strong rally in Q3 following a very brief dip below 64c.
The bias in Q4 is to seek dips in anticipation of a break above 70c and retest he 2023 high. As we expect volatility to increase further in Q4, we’ve allowed for a 9% high-to-low range.
-- Written by Matt Simpson, Senior Market Analyst
Follow Matt on X: @cLeverEdge
