Hidden Opportunity or Danger Lurking Ahead for AUD/USD?

Last Week's Market Wrap

  • The AUD/USD managed to shrug off losses in the first 2 days of trading and continues it’s ascend after it upbeat CPI data helped lift sentiments.
  • Australian CPI rose to 0.5% QoQ from previous period of 0.4%, beating estimates for a no change at 0.4% QoQ.
  • The US Fed met expectations for a pause in rate hike this month while also expressing that they would be “patient” in future rate hikes and normalization of the Fed’s balance sheet.
  • Chinese PMI data continues to disappoint as it declined to 48.3 MoM from a previous period of 49.7 and added pessimism that the Chinese economy’s weakness may yet to pass.
  • The US Nonfarm payroll beat expectations on Friday with a gain of 304,000 ( expectations for 165K) in January, but the optimism soon reversed as unemployment rate crept up and wage growth fell short of expectations. The previous month’s job data was also revised downwards to 222K and had market doubting that January’s stellar job data performance may not be what it seems.
  • Trade talks between the US and China’s top officials on Wednesday and Thursday ended with both parties expressing optimism in the prospect of reaching a deal, but little details were provided. US President Trump and China’s Xi Jinping are slated to meet again this month to seal the deal.
  • US ISM manufacturing PMI rose to 56.6, beating modest expectations that it will remain unchanged at 54.1

The Week Ahead

  • Australia’s retail sales data on Monday expected to remain depressed at 0.0% from the previous period of 0.4%.
  • RBA will also deliver their rate decision statement on Tuesday. It is widely expected that they would leave interest rates untouched, but any action or indication to raise interest rates may help to accelerate the rise of the AUD. This would be the highlight event for the AUD next week.
  • USD Fed Powell to speak again on Thursday. Watch out for any indications of a change in the future interest rate stance.

RBA TO SET THE COURSE OF AUD STRENGTH IN UPCOMING WEEK

The AUD/USD managed to shrug off losses in the first 2 days of trading and continues it’s ascend after it upbeat CPI data helped lift sentiments. Following which, the dollar declined further due to dovish comments from the US Fed on Thursday but recovered some grounds on Friday close as the NFP data came in stronger than expected. Latest US-China trade talks optimism over a possible resolution also kept the dollar at bay while boosting the AUD.

For the upcoming week, the RBA’s rate decision on Tuesday will largely set the tone for the rest of the week. The RBA is widely expected to keep interest rate unchanged. While this decision certainly meets market expectation, there is a possibility it may not sit well with the market. This is because, RBA has been emphasizing that the next move will only be up, but delayed making such a decision on the backdrop of a subdued domestic economic environment and slowing growth in China. Therefore, delaying a rate hike again may imply that the Australian economy is still too weak to withstand a rate hike and could spur an AUD sell-off.

Now, even though we explored a possible market reaction to the rate decision, we must not forget there is still optimism surrounding the US-China trade talks, and it continues to underpin the strength of the China-proxy AUD, at least till US President Trump and China’s Xi meets again to make a deal. So, not all is lost.

Hence, the immediate reaction of the market may be a sell-off after the rate decision, but therein also lies an opportunity to buy the AUD at a lower price in anticipation of a US-China trade deal succeeding and an eventual rate hike. The only tough part is identifying when the sell-off will actually stop.

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