AUD USD on the brink ahead of NFP

The US monthly jobs report will be released a day earlier than usual today and analysts are feeling bullish as expectations are that the headline nonfarm payrolls number probably increased by a good 230 thousand in June. The unemployment rate is likely to have fallen back to 5.4% from 5.5% in May, while the average hourly earnings are seen increasing by 0.2% versus a gain of 0.3% previously.

Ahead of the jobs report, the dollar is looking strong, particularly against the commodity currencies due to the weakness in oil and metal prices. The New Zealand and Australian dollars in particular look bleak following the release of some weaker data overnight from those nations. Indeed, it is the AUD/USD that has caught my attention today as it appears to be on the verge of a technical breakdown as expectations grow that the interest rate differential between the Australian and US central banks will narrow. This view would get stronger if today’s US jobs data surprises to the upside which would undoubtedly increase calls for a September rate hike at the Federal Reserve.

As the daily chart of the AUD/USD shows, below, price is currently hovering dangerously above the 0.7600 handle, which has been a strong support level in the past. Today it could finally break down and the trigger could well be the US jobs report. If it does break lower, we think that the fallout would be significant. That’s because of the length of time the Aussie has spent in consolidation above this 0.7600 level. What’s more, the most recent rally only managed to climb to the 38.2% Fibonacci level (point C on the chart), which represents a shallow retracement. This suggests that the bulk of the market participants are probably positioned short and that if prices were to break down then the next leg lower could be significant as the existing bulls rush for the exits and fresh sellers come into play.  In fact, the AUD/USD has already broken a bullish trend line after its key reversal day on Wednesday, when price formed a large bearish engulfing candle on the daily chart. The resistance trend is clearly established and there are bearish MACD crossovers on the 4-hour and daily charts, too.

If the bears succeed here, as we think they might, and take out the 0.7600 support, the immediate targets to watch next would be around 0.7530/5, the April low and the 127.2% extension level of the up-move from the June low (BC swing); 0.7500, a psychological level and then 0.7440, the 161.8% extension of the  BC swing. Thereafter are the longer-term Fibonacci extension levels of the upswing from the April low, at 0.7360 (127.2%) and 0.7140 (161.8%) – i.e. those of the XA swing.

Meanwhile the above-mentioned bearish setup would become invade if the Aussie breaks above the bearish trend line around 0.7700. In this case a rally towards the key resistance and the 50-day SMA around 0.7800 could be highly likely.