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  • AUD/USD saw downside during Monday’s Asia Pacific and early European session, dropping momentarily as low as 0.7660.
  • The pair broke below an uptrend linking the 28 December 2020 high with the 4, 11 and 15 January lows.
  • It was a somewhat risk-off start to the week for FX markets, with risk-sensitive AUD underperforming.

AUD/USD saw downside during Monday’s Asia Pacific and early European session, dropping momentarily as low as the 0.7660 mark before paring back to current levels in the 0.7680s, where it has spent the last few hours consolidating amid thin trade (US players have been away for MLK holidays). Ahead of the Monday FX close, the pair trades about 0.3% or just over 20 pips lower.

The pair broke below an uptrend linking the 28 December 2020 high with the 4, 11 and 15 January lows on Monday, opening the door to a gradual further move to the downside towards the support just below the 0.7650 mark (the 17 December high and 4 January low). This would require a break below the 21-day moving average at 0.7673 first. Conversely, if the AUD bulls/USD bears regain control and push the pair back above the recently broken uptrend, AUD/USD could see a gradual grind back towards recent highs just above the 0.7800 level.

FX markets start week on the defensive

It was a somewhat risk-off start to the week for FX markets. Safe haven JPY was the best-performing currency in the G10, while risk-sensitive NOK, NZD and AUD have been the worst. No specific theme or headline can be pinpointed as to why markets were feeling downbeat, though market commentators have pointed to the fact that China reported over 100 Covid-19 cases for the sixth day in a row, raising fears that more of the country may be placed under lockdown ahead of next month’s Lunar New Year holiday celebrations. Currently, 29M people in China are in lockdown.

Meanwhile, mixed Chinese hard data released midway through the Asia Pacific session broadly failed to lift the mood. While Q4 GDP beat expectations on a YoY basis, coming in at 6.5% versus expectations for a 6.1% reading, the QoQ reading came in below expectations at 2.6%. Moreover, while December Industrial Production was a little stronger than expected (at 7.3% YoY), December Fixed Asset Investment and Retail Sales disappointed.

Analysts have also pointed to growing fears that the Biden administration is going to under-deliver on stimulus; Wall Street Democrat sources reportedly told Fox Business News reported Charles Gasparino that US President-elect Joe Biden might have to scale back spending plans and increases to the minimum wage given a divided government and potential opposition from moderate Democrats.

Markets are likely to find a much more convincing direction in the coming days, however, and AUD will either slip further back from its recent 0.7800 highs or grind back towards a re-test of this key level.

Driving the week

AUD traders will be on notice for the release of December HIA New Home Sales data at 00:00GMT on during Tuesday night’s Asia Pacific session. Thursday’s Asia Pacific session will be particularly busy, with the release of the official December jobs report, as well as Westpac Consumer Confidence numbers for January. Preliminary PMI numbers will then be released during Friday’s Asia Pacific session.

Turning to the key events for USD traders to watch this week. They predominantly revolve around US politics; former Fed Chair and US Secretary of the Treasury Janet Yellen testifies to the US Congress on Tuesday. Much of her prepared remarks have already been released; Yellen is set to declare that it is time to “act big” regarding fiscal stimulus to aid with the recovery given that government borrowing costs are so low. Absent more economic aid, Yellen says she sees the risk of a longer, more painful recession.

Moreover, Yellen is expected to clarify the US government’s position on the US dollar; she is expected to make it clear that the US will not seek to purposely weaken the US dollar. According to the Wall Street Journal, Yellen will say that “the value of the U.S. dollar and other currencies should be determined by markets. Markets adjust to reflect variations in economic performance and generally facilitate adjustments in the global economy” if asked about the incoming administration’s dollar policy.

Any departure from such a policy could trigger some volatility in USD and in precious metals markets. However, calls for a weaker USD does not mean getting a weaker USD; outgoing US President Donald Trump spent much of the last four years calling for a weak USD to help US exporters but failed to get until right at the end of his term, and that was only to do with the Fed’s actions to combat the pandemic. His protectionist trade policies and fondness of fiscal stimulus were seen as a USD positive combination at the time.

Bank of Singapore analyst Moh Siong Sim notes that Yellen “is kind of signalling a hands-off approach, which is reverting to what had traditionally been the case before Trump… I think the dollar and financial markets will be less of a focus, in terms of verbal rhetoric, for the Treasury secretary and the key focus will be getting policy implemented in terms of fiscal relief”.

Biden’s inauguration, which takes place on Thursday, will be scrutinised for any more commentary on fiscal stimulus, with doubts growing that the incoming President will be able to deliver the whole $1.9T promised package. Any hints of violence might also cause some jitters, as the violence on Capital Hill did earlier in the month, though, with security forces much better prepared this time around, things are expected to go smoothly.

AUD/USD four hour chart