The Australian dollar has rallied significantly during the trading session on Monday to show signs of strength again. At this point, the market has broken above the 0.71 level, and now it looks like we are going to threaten the 0.72 level. The 0.72 level above is what I would consider a short-term ceiling that could determine where the trend is going next. In this scenario, I like the idea of fading some type of exhaustion in this pair, as we continue to favor the US dollar.

The 0.70 level underneath should be a bit of a support level, and if we can break down below that level it is likely that we could go reaching the bottom. All things being equal, this is a market that will eventually go looking to figure out what it wants to do next, but it is a long-term downtrend that is still very strong, and it is obvious that the US dollar is desired. In general, the market will continue to see a line of noise, and you should keep in mind that the Australian dollar is highly sensitive to risk appetite in general, right along with commodities. Furthermore, the Australian dollar is going to have to deal with any knock-on effect from China, as China is by far Australia’s biggest customer.

Pay close attention to interest rates coming out of the United States, because that has been a major driver of where we have been going for a while. With this, I am looking for signs of exhaustion that I can jump upon, and therefore it is a simple waiting game at this point.
（From Yahoo Finance）

MONDAY’S MARKET RECAP – SENTIMENT ON THE MEND, OR AT LEAST IT WAS
Global risk appetite was on the mend to begin the new trading week. S&P 500, Dow Jones and Nasdaq 100 futures rallied 1.85%, 2.01% and 1.64% respectively. As a result, the sentiment-linked Australian and New Zealand Dollars outperformed. The haven-linked US Dollar weakened, especially as the Euro soared on news that the European Central Bank brought forward rate hike expectations for the third quarter.

Or at least that is what it seemed. Right after stocks closed for trading on Wall Street, Snapchat announced its latest earnings report. The social media company estimated that revenue and adjusted Ebitda (earnings before interest, tax, depreciation and amortization) will be below the low end of guidance. Snap also said that the macroeconomic environment has “deteriorated further and faster than anticipated”.

As a result, Snap Inc. saw its share price drop a whopping 30 percent in after-hours trade – see chart below. There was a domino-like impact on other corners of the market. Facebook/Meta shares declined about 7.5%. This also sent S&P 500 futures into the red, evaporating a decent chunk of gains seen from Monday’s trading session.

TUESDAY’S ASIA PACIFIC TRADING SESSION – AUSTRALIAN DOLLAR, ASX 200, CHINESE YUAN
The turnaround in risk appetite is leaving the Australian Dollar and New Zealand Dollar at risk for Tuesday’s Asia-Pacific trading session. Anti-risk currencies like the US Dollar and Japanese Yen could benefit. This is also for what is going to be a quiet day in terms of economic event risk, placing the focus for traders on general risk appetite.

This may also leave regional stock exchanges vulnerable, placing the ASX 200, Nikkei 225 and Hang Seng Index at risk. The Chinese Yuan has also been getting some attention lately. USD/CNH fell 1.47% in the worst drop since November 2020 last week. Overnight, US President Joe Biden announced that he would review Chinese tariffs imposed by the previous administration. The Yuan rallied some more. That could introduce more demand for Chinese goods, driving capital flows and boosting the local currency.

— Written by Daniel Dubrovsky, Strategist for DailyFX.com

Global market sentiment continued deteriorating this past week. On Wall Street, futures tracking the S&P 500, Nasdaq 100 and Dow Jones weakened by 2.97%, 4.49% and 2.81% respectively. For the S&P 500, this meant a 7th consecutive weekly losing streak. That was the worst consistent performance since 2001.

Risk aversion did not mean another strong week for the haven-linked US Dollar, which weakened the most since late January. As a result, some of its major peers outperformed. These included the Euro and British Pound. In fact, GBP/USD rose over 1.9% in the strongest weekly return since the end of 2020. The Australian and New Zealand Dollars outperformed as well.

It seems there were growing concerns about a US recession down the road as the markets priced out some Federal Reserve tightening in 2023. Treasury yields continued to level off, with the 10-year seeing its worst 2-week performance since November. Weakness in the US Dollar and government bond yields meant gold prices shined, gaining 1.9%.

The economic docket notably picks up in the week ahead. FOMC minutes will be closely eyed, which could uphold the Federal Reserve’s hawkish stance. The central bank will also be eyeing its preferred gauge of inflation, PCE core. As such, these events could continue threatening general risk appetite.

The New Zealand Dollar will be awaiting the RBNZ rate decision. A 50-basis point rate hike is expected to 2.00% from 1.50% prior, with more to come in July. A federal election in Australia might do little to influence the Australian Dollar given the policies being prescribed by the two major parties. What else is in store for markets in the week ahead?
(From DailyFX)

AUD/USD REBOUND TAKES SHAPE AHEAD OF AUSTRALIA EMPLOYMENT REPORT
AUD/USD seems to have reversed course ahead of the June 2020 low (0.6648) amid recovery in global benchmark equity indices, with the exchange rate trading to a fresh weekly high (0.7041) as the Reserve Bank of Australia (RBA) Minutes reveals that “timely evidence from liaison and business surveys indicated that labour costs were rising in a tight labour market and a further pick-up was likely over the period ahead.”

As a result, the RBA insists that “that further increases in interest rates would likely be required to ensure that inflation in Australia returns to the target over time,” and the update to Australia’s Employment report may generate a bullish reaction in AUD/USD as the economy is anticipated to add 30.0K jobs in April.

Image of DailyFX Economic Calendar for Australia
At the same time, the Unemployment Rate is seen narrowing to 3.9% from 4.0% during the same period, and the ongoing improvement in the labor market may encourage the RBA to deliver a series of rate hikes over the coming months as the central bank acknowledges that “there is no contemporary experience as to how labour costs and prices in Australia would behave at an unemployment rate below 4 per cent.”

In turn, AUD/USD may stage a larger recovery ahead of the next RBA meeting on June 7 as Governor Philip Lowe and Co. prepare Australian households and businesses for higher interest rates, and a further advance in the exchange rate may alleviate the tilt in retail sentiment like the behavior seen earlier this year.
The IG Client Sentiment report shows 66.17% of traders are currently net-long AUD/USD, with the ratio of traders long to short standing at 1.96 to 1.

The number of traders net-long is 6.18% lower than yesterday and 15.62% lower from last week, while the number of traders net-short is 12.24% higher than yesterday and 26.92% higher from last week. The decline in net-long position comes as AUD/USD climbs to a fresh weekly high (0.7041), while the jump in net-short interest has helped to alleviate the crowding behavior as 74.02% of traders were net-long the pair last week.

With that said, another uptick in Australia Employment may fuel the recent series of higher highs and lows in AUD/USD as it fuels speculation for another RBA rate hike, but the rebound from the yearly low (0.6829) may turn out to be a correction in the broader trend with the Federal Reserve on track to normalize monetary policy at a faster pace.

Keep in mind, AUD/USD took out the July 2020 low (0.6877) after snapping the opening range for May, but the exchange rate appears to have reversed course June 2020 low (0.6648) as the recent rebound in price pulls the Relative Strength Index (RSI) out of oversold territory.
AUD/USD carves a series of higher highs and lows amid the lack of momentum to break/close below the Fibonacci overlap around 0.6770 (38.2% expansion) to 0.6820 (50% retracement), with the move above the 0.6940 (78.6% expansion) area bringing the 0.7070 (61.8% expansion) to 0.7090 (78.6% retracement) region on the radar.
Next area of interest comes in around 0.7130 (61.8% retracement) to 0.7180 (61.8% retracement) followed by the 0.7260 (38.2% expansion) region, which largely lines up with the 200-Day SMA (0.7265).
— Written by David Song, Currency Strategist

The IG Client Sentiment report shows only 26.83% of traders are currently net-long USD/JPY, with the ratio of traders short to long standing at 2.73 to 1.

The number of traders net-long is 0.73% lower than yesterday and 6.55% lower from last week, while the number of traders net-short is 8.44% higher than yesterday and 3.65% higher from last week. The decline in net-long position comes as USD/JPY extends the rebound from the monthly low (127.52), while the rise in net-short interest has fueled the crowding behavior as 27.86% of traders were net-long the pair last week.

With that said, the US Dollar may appreciate against its Japanese counterpart throughout 2022 as the FOMC normalizes monetary policy well ahead of the BoJ, but the RSI may continue to show the bullish momentum abating as it develops a downward trend even as USD/JPY traded to a fresh yearly high (131.35) earlier this month.
USD/JPY appeared to be on track to test the April 2002 high (133.82) as a bull flag formation materialized last month, but recent price action warns of a near-term correction in the exchange rate as it fails to defend the opening range for May.
At the same time, the Relative Strength Index (RSI) has established a downward trend as it continues to fall back from overbought territory, and lack of momentum to push back above the 129.40 (261.8% expansion) to 130.20 (100% expansion) region may lead to a break/close below the Fibonacci overlap around 126.20 (78.6% expansion) to 127.20 (23.6% retracement) if the recent series of higher highs and lows in the exchange rate unravels.
In turn, USD/JPY may look to test the 50-Day SMA (124.97) for the first time since March, with a move below the moving average bringing the 124.50 (38.2% retracement) area on the radar.

— Written by David Song, Currency Strategist

Risk assets closed mostly lower last week, although US equity markets trimmed losses heading into the weekend after comments from Federal Reserve Governor Jerome Powell spurred some buying. Mr. Powell stated that larger rate hikes are off the table for the time being. However, the Fed couldn’t guarantee a soft landing for the economy. The Dow Jones Industrial Average (DJIA) shed a bit over 2% for the week, while the high-beta Nasdaq-100 Index (NDX) sank nearly 3%.

The US Dollar softened slightly on Friday, but the DXY index remains near its highest level since December 2002. Economists will evaluate the upcoming April retail sales data set to cross the wires on Tuesday as the chances for a recession grow. Analysts see retail sales dropping at 0.9% on a month-over-month basis, which would be up from 0.5% m/m in March. A hotter-than-expected print may help cool fears over an impending economic slowdown.

Oil prices rose into the weekend, nearly trimming all losses from the week, as the high-demand summer season bolsters concerns about lagging supply. Gasoline prices hit a record high, according to AAA. That came despite a build in crude oil inventories at Cushing, Oklahoma. Still, inventory of refined products fell amid surging export demand across Europe and Asia. The gap left by Russian oil has fueled heavy overseas demand for US refined products. It is also important to consider ongoing releases from the Strategic Petroleum Reserve, which is skewing inventory data. Oil prices may increase going into the US Memorial Day holiday weekend later this month.

Across the Atlantic, the British Pound fell versus most of its peers, extending the prior week’s momentum after the Bank of England trimmed its economic growth targets. A weaker-than-expected print on GDP growth for March added to Sterling’s woes. GBP/USD may move on this week’s employment data, with analysts expecting to see 5k jobs added for February, according to Bloomberg data. UK inflation data is also likely to command some attention as markets continue to grapple with forecasting inflation.

The Australian Dollar fell to its lowest point since June 2020 versus the Greenback. A further tumble in iron ore prices weighed on the currency, adding to broader pressure from the risk-off tone across financial markets. China’s ongoing fight against Covid-19 has shuttered factories across the economic powerhouse, leading to lower consumption of metal-producing products. AUD/USD may have a chance at a revival this week if the Australian jobs report impresses. Analysts are expecting Australia to add 25k jobs for April, according to a Bloomberg survey. That would be up from 17.9k in March. RBA rate hike bets may increase on a rosy print, potentially pushing the Aussie Dollar higher alongside yields.
(From DailyFX)

USD/JPY TO FACE LARGER PULLBACK ON BREAK OF MONTHLY OPENING RANGE
USD/JPY appears to be tracking the recent weakness in US Treasury yields as it consolidates after clearing the April high (131.25), while the Relative Strength Index (RSI) has diverged with price as the oscillator continues to fall back from overbought territory.

Developments in the RSI warn of a near-term correction in USD/JPY as the indicator fails to push back above 70, but another holding pattern may take shape over the coming days as a bull flag formation materialized during the previous month.

As a result, USD/JPY may face a shallow pullback before staging another attempt to test the April 2002 high (133.82) amid the diverging paths between the Federal Reserve and Bank of Japan (BoJ), and expectations for higher US interest rates may keep the exchange rate afloat as Chairman Jerome Powell and Co. look to normalize monetary policy throughout the year.
In turn, the CME FedWatch Tool reflects a greater than 80% probability for at least a 50bp rate hike at the next interest rate decision on June 15, and recent remarks from New York Fed President John Williams suggests the central bank will continue to adjust policy over the coming months as the permanent voting member on the Federal Open Market Committee (FOMC) pledges to “move expeditiously in bringing the federal funds rate back to more normal levels this year.”

Until then, USD/JPY may consolidate as the RSI shows the bullish momentum abating, but the tilt in retail sentiment looks poised to persist as traders have been net-short the pair since late January.

— Written by David Song, Currency Strategist

A wave of risk aversion spread through global financial markets last week, pushing major equity indexes across the United States, Europe and Asia lower. The Dow Jones Industrial Average (DJIA) shed over 1%, while the technology-heavy Nasdaq-100 Index (NDX) outpaced those losses, dropping over 2%. Investors were unimpressed with a set of high-profile earnings reports, including Google, Apple and Amazon.

Elsewhere, energy markets caught a bid as European regulators embraced a previously shunned move to cut off Russian oil exports. Germany’s Economy Minister Robert Habeck, on Thursday, said “We have made a lot of progress on oil and could join an embargo if it happened.” That capitulation was viewed by the market as a green light for the 26-member bloc to move forward on an embargo, although a plan has not yet been released. Brent crude oil prices rose more than 2% through Friday.

The US Dollar and equity markets will be front and center for traders on Wednesday, with the Federal Reserve slated to announce a 50-basis point rate hike. Rate traders are also expecting details on the Fed’s plan to draw down its balance sheet, which ballooned to more than $9 trillion through the pandemic. The DXY index, which hit a multi-decade high, may sell off on the announcement given the market’s rapid repricing of rate hike bets in the overnight swaps market over the past several weeks, a possible “sell the news” event.

Alternatively, if the Fed underdelivers against hawkish expectations, markets may see the central bank falling back behind the curve on inflation. Such a move may bolster gold’s appeal to investors. The Bank of England (BoE) is another possible market mover in the days ahead. The British Pound succumbed to USD strength, dropping nearly 2% last week. The BoE is expected to hike its benchmark rate by 25-bps, and Sterling traders are on the watch for details on a plan to sell UK Gilts. Will GBP/USD continue to fall?

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Also important, although flying under the radar, is the Treasury’s government-debt issuance plan, expected to drop before the FOMC announcement. The Treasury may increase its debt offerings to counteract any negative impacts on funding needs from a balance-sheet runoff. However, a strong tax receipt season helped bolster the nation’s bank account to over $900 billion, which should cover the current deficit account.

Rate traders appear split on whether or not the Reserve Bank of Australia will implement a 15-basis point rate hike. The hawk’s case for a hike is last week’s red-hot consumer price index (CPI) number for the first quarter. The RBA may remain in its relatively dovish stance, given the headwinds presented by the slowdown in the economy of its largest trade importer, China. Cash rate futures, on Friday, were pricing in just over a 50% chance for a hike. If the RBA opts to act, it may help underpin the ailing Australian Dollar.

The US April non-farm payrolls report will close out the US docket on Friday, when analysts expect to see 395k jobs added, according to a Bloomberg survey. Usually, the main event for markets, the jobs report is likely to play second fiddle to the Fed’s announcement. That doesn’t mean an outsized miss or beat wouldn’t have a market impact, however. Canada is also slated to release jobs data for April on Friday. The Canadian Dollar lost ground versus the Greenback despite higher oil prices.

China and its ongoing Covid-induced lockdown woes will remain under scrutiny. Beijing’s relentless pursuit of its “Zero-Covid” strategy has cast a cloud over the country’s economic growth outlook. The IMF, along with several big banks, have downgraded growth forecasts recently after Beijing locked down, adding to a growing list of restrictions in megacities that have strained the economy. The National Bureau of Statistics (NBS) is expected to report a second month of contraction in the manufacturing sector. A weaker-than-expected print could add to the Yuan’s troubles.

AUSTRALIAN DOLLAR TALKING POINTS
AUD/USD trades to a fresh monthly low (0.7055) as it extends the series of lower highs and lows from last week, and recent developments in the Relative Strength Index (RSI) warn of a further decline in the exchange rate as it pushes into oversold territory for the first time in 2022.
AUD/USD OUTLOOK: RSI FLIRTS WITH OVERSOLD TERRITORY AHEAD OF RBA MEETING
AUD/USD is on track to test the February low (0.7033) as it gives back the advance following the larger-than-expected uptick in Australia’s Consumer Price Index (CPI), and the US Dollar may continue to appreciate against its major counterparts as it benefits from the ongoing deterioration in risk appetite.

The shift in investor confidence looks poised to persist ahead of the next Reserve Bank of Australia (RBA) interest rate decision on May 3 as the US economy unexpectedly contracts in the first quarter of 2022, and the move below 30 in the RSI is likely to be accompanied by a further decline in AUD/USD like the behavior seen late last year.

However, a change in RBA policy may curb the recent selloff in AUD/USD as the central bank is expected to lift the official cash rate (OCR) from 0.10% to 0.25%, and a material change in the forward guidance for monetary policy may shore up the Australian Dollar if Governor Philip Lowe and Co. prepare households and businesses for a series of rate hikes.

Until then, swings in risk appetite may sway AUD/USD as the US stock market appears to be finding support, but a further decline in the exchange rate may continue to fuel the recent flip in retail sentiment like the behavior seen during the previous year.

Image of IG Client Sentiment for AUD/USD rate
The IG Client Sentiment report shows 73.14% of traders are currently net-long AUD/USD, with the ratio of traders long to short standing at 2.72 to 1.

The number of traders net-long is 5.49% higher than yesterday and 28.41% higher from last week, while the number of traders net-short is 14.48% lower than yesterday and 41.14% lower from last week. The rise in net-long interest has fueled the crowding behavior as 69.25% of traders were net-long AUD/USD earlier this week, while the decline in net-short position comes as the exchange rate trades to a fresh monthly low (0.7055).

With that said, AUD/USD may attempt to test the February low (0.7033) as it extends the series of lower highs and lows carried over from last week, and developments in the RSI may show the bearish momentum gathering pace as the indicator pushes below 30 for the first time this year.

— Written by David Song, Currency Strategist