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Australia data - spending measure expanding at fastest pace in 7½-years
AUD/USD: Commodity Currencies Struggle To Gain On Dollar Correction
A correction in the trade-weighted Dollar index (DXY) from a high posted during the North American open on Tuesday has served to erase the bulk of the gains this week, but commodity currencies are seen depreciating against the Greenback with AUD/USD hovering around weekly lows.
DXY continues to struggle against 103.54 resistance, a level seen on a monthly chart referencing a spike low from July 2002. The level had elicited a pullback late last week and has once again come into play this week. Despite a marginal high on Tuesday, the index has fallen into a range in the past four sessions.
A small advance in AUD/USD on Tuesday led to a green candle on a daily chart to snap a four-day losing streak in the pair. Bearish pressure since last week’s Fed meeting has resulted in a total loss of nearly 3.5% in the currency pair.
The recovery in the pair from lows posted on Tuesday was met with sellers at resistance residing at 0.7277. The level had previously held the pair higher on an hourly chart on Friday and during this week’s open.
The Loonie has led the decliner’s list in today’s trading thus far with the Aussie falling behind to show the second largest losses among the majors. The Euro leads the gainer’s list, advancing against all of its major counterparts.
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AUD/USD Forecast December 26, 2016
The Australian dollar fell during the Friday session, as we continue to see quite a bit of negative pressure and the Aussie. The market should then reach to the 0.70 level underneath, which of course is a large, round, psychologically significant number. With this in mind, I believe that it’s only a matter of time before sellers return every time we start to rally. I think exhaustive candles at higher levels offer nice selling opportunities offer short-term charge, but this time year tends to be quiet so looking for massive moves is probably asking quite a bit.
AUD/USD Weekly Forecast December 26-30
AUD/USD continued to plunge in the past week, posting losses in four out five sessions. The Australian Dollar was the worst performer in the past week versus its major counterparts while the Japanese Yen led the gainer’s list. The pair ended the week at notable support and while momentum has been strong to the downside, the upcoming week offers the potential for a bounce.
Support at 0.7165 had held the pair higher in late May, triggering a turn higher in a bullish trend. The trend lasted until early November when the US elections provided a catalyst for a turn lower. The pair reached the level at the North American open on Friday and fell into a consolidation until the weekly close. The area will be closely watched in the upcoming week as there is a good probability a bounce could materialize.
Volatility in the upcoming week will tend to be unpredictable as it is the last week of the year. Trading conditions are expected to be thin and there will be some potential for drastic fluctuations, especially around important levels where stops could be triggered.
Economic data for the week is light in terms of high impacting releases. Out of the United States, consumer confidence figures will be released on Tuesday and the weekly unemployment claims will be reported on Thursday. There is a bank holiday in both Australia and the United States on Monday.
Out of the United States in the past week, durable goods orders were reported to decline 4.6%, the final reading of quarterly GDP rose 3.5%, and the core PCE price index ticked lower to 1.6% on an annual basis.
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AUD/USD Attempting To Gain Upside Momentum From Important Support
Following a second test of support at 0.7165 on Wednesday, AUD/USD has bounced higher, threatening resistance from a range that has played out throughout the week.
Support at 0.7165 is seen as an important level as it had prompted a turn in trend in May, resulting in a bullish trend that lasted until the US elections in November. The currency pair initially reached the level on Friday and has been consolidating above the level since. Volatility has slowed in the last week of the year, partially attributing to the range that is playing out while some of the other majors have made notable technical moves today.
NZD/USD has recovered for a second consecutive session to erase losses from the prior week. After holding below support turned resistance from 2015 lows for nearly two weeks, EUR/USD has made a sustained break above the 1.0462 level. The technical developments in the other major pairs tend to favor an upside break from the range that is playing out in AUD/USD.
The bulk of the gains in AUD/USD has come in the Asian session and a range has formed near a confluence of resistance following the initial rally. A declining trendline connecting Monday’s highs with Wednesday’s high has held the pair lower on two tests today. Adding confluence is a horizontal level at 0.7221. The level marks a spike low from last Wednesday and had held the pair lower in the early week.
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Australia - Private Sector Credit (November): +0.5% m/m (expected +0.5%)
2017 AUD/USD Annual Forecast
The last week of the year proved interesting for the AUD/USD because the Forex pair was in a position at one point to close exactly where it ended the year in 2015. However, this is essentially meaningless at this point in the game because the pair could easily see more downside in 2017 defending on U.S. inflation and interest rates.
The AUD/USD started the year at .7283 and closed the year at .7201, finishing down -0.0081 or -1.12%.
The Australian Dollar gained against the U.S. Dollar at the start of 2016 when it started to become clear that the Fed would refrain from making its projected rate hikes due to a weakening U.S. economy and global turmoil. Whether it was weakness in China, Brexit or the election, the Fed kept backing off from raising rates until it was forced to do so in December.
While the Fed was debating when to raise rates, the Reserve Bank of Australia started to become concerned about its slowing economy and the value of the currency and its potential negative impact on exports.
The AUD/USD reached its high on April 21 at .7834, about two weeks before it slashed the official interest rate on May 3 to a new historic low of 1.75 percent in order to combat low inflation and stimulate the slow-growing economy.
The RBA was at it again on August 2, cutting its interest rate to another record low of 1.50 percent in a bid to prevent low inflation from choking off the economic recovery amid sluggish wages growth.
Late in the year, it was reported that Australia’s GDP shrank by 0.5% in the September quarter, only the fourth such decline in 25 years. Although most analysts think the GDP will make a recovery in the fourth quarter, helping the country to avoid a recession, there are still some who believe the RBA will have to cut its cash rate at least twice in 2017 to 1%.
Forecast
The Australian Dollar faces a number of downside factors in 2017. These include expectations for higher U.S. inflation and speculation of more easing from the Reserve Bank of Australia (RBA) at a time when the U.S. Federal Reserve could be raising rates as many as three times.
Although the deck seems to be stacked against the Aussie in 2017, we could see pockets of support develop if there is an increases in prices and demand for iron ore, Australia’s best commodity export.
Traders should look forward to a turbulent trade in 2017. The long-term trend at the start of the year for the AUD/USD is bearish, with investors betting heavily that U.S. President-elect Donald Trump will propose a series of inflation-boosting policies – including massive fiscal spending, tax cuts, the elimination of some trade deals and deregulation in certain industries – when he officially takes office on January 20.
Higher U.S. inflation should lead to higher U.S. interest rates from the Federal Reserve, but this is no guarantee. Going into 2016, it projected at least four rate hikes, but delivered only one in December. For 2017, it projects at least three rate hikes.
Rising U.S. rates will continue to tighten the spread between U.S. Treasury Bonds and Australian Government Bonds. The differential will tighten even faster if the Reserve Bank of Australia resumes its easing cycle like some are predicting. This will lead to an even faster demise of the carry trade as investors will rush to get money out of Australia and into U.S. assets.
There is always the possibility the AUD/USD will remain stagnant or even rally if the U.S. economy weakens enough for the Fed to postpone or even eliminate interest rate hikes like it did last year.
Fed Chair Janet Yellen is particularly sensitive to market volatility and she has been known to push for a postponement of a rate hike even when the financial markets are screaming for the Fed to increase rates. Her read of global market volatility will be a wild card throughout the year.
Taking the recent central bank statements at face value, we see can see the RBA cutting rates and the Fed raising rates, a situation that will be bearish for the AUD/USD in 2017.
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AUD/USD Weekly Forecast January 2-6
AUD/USD remains in the consolidation phase that has been underway since the decline from the December rally peak bottomed on December 23rd. This reaction low represents a test of important support at the low established in the latter part of May 2016.
A move to the upside from current levels which results in a sustained break above the November low at 0.7309 is required to suggest a sustainable bottom and successful test of support have been established, and further upside is likely in the weeks ahead. On such a development, the next target would become the December high at 0.7524.
Should the pair make a move to the downside and take out the recent lows, as well as the May corrective bottom, the next target would become the late February low near 0.7100, with the potential for a follow through decline to the January corrective bottom at 0.6827.
However, with the Stochastic, a price momentum indicator, moving higher from an oversold level, the bias heading into this week’s trading is to the upside, with at retest of first resistance expected.
In Australia, the AIG Manufacturing Index as well as the trade balance will be in focus in next week’s trading. The former is due in overnight trading Monday, while the latter is due overnight Thursday.
In the U.S., the main focus will be the U.S. employment report, due to be released on Friday at 8:30 am ET. Consensus estimate is for an increase of 175K jobs, following a reading of 178K in November. This report will be important in regard to the expectations of the pace of interest rate increases in the U.S. throughout 2017.
Australia - CoreLogic House Prices for December: +1.4% m/m (prior +0.2%)
For the year, the CoreLogic house price index up 10.9%. For its fastest growth since the calendar year 2009
Australia - Services PMI for December: 57.7 (smashing the prior of 51.1)
Australian Industry Group Performance of Services Index