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The Australian dollar continues to lead with another week of significant gains across the board. Is a correction due now? The upcoming week is very busy. The rate decision is highlight amongst 11 events. Here’s an outlook for these events, and an updated technical analysis for AUD/USD.

Not only did the Aussie enjoy the weakness of the greenback after Bernanke’s QE2 Lite announcement, but it also rocked on strong Australian data. Quarterly CPI rose by 1.6%, stronger than expected. The RBA will probably need to move on the rates sooner than later. Will it happen now? Let’s start.

AUD/USD daily chart with support and resistance lines on it. Click to enlarge:

AUD USD Chart  May 2-6

  1. Chinese Manufacturing PMI: Sunday, 1:00. Australia’s main trade partner has a strong influence on the currency. This publication, released when the markets are closed, will set the tone for the beginning of the week. China is expected to report stronger growth in the manufacturing sector, with the score rising from 53.4 to 54 points. Update: The actual result is 52.9, below expectations. This could weigh on the Aussie at the beginning of the week.
  2. HIA New Home Sales: Publication time unknown at the moment.  The housing industry association has a less volatile housing sector indicator in comparison with the building approvals report also published this week. Two months of rises will probably be followed by a third one, although the pace is likely to be moderate.
  3. AIG Manufacturing Index: Sunday, 23:30. The Australian Industry Group publishes a series of unofficial purchasing managers’ indices this week. The first, for the manufacturing sector, jumped above the critical 50 point mark two months ago, indicating growth in this sector, but it fell afterwards to 47.9 points – more contraction. An improvement is likely now.
  4. MI Inflation Gauge: Monday, 00:30. As the government publishes inflation figures only once per quarter, this unofficial gauge from the Melbourne Institute fills the gap nicely. In this case, we just got fresh inflation data from the government for the first quarter, and it was higher than expected. Also MI is likely to show an acceleration in prices, even higher than last month’s 0.6% rise.
  5. HPI: Monday, 1:30. There are various indicators for the housing sector that are published earlier, but due to the fact that it is official and that it’s published only once per quarter, the FPI is of importance. Q4 was surprising with a rise of 0.7% in prices. We now expect a small drop of 0.3%.
  6. Commodity Prices: Monday, 6:30. Australia’s commodity-oriented economy depends a lot on global prices, especially for metals. This year-over-year indicator has shown a differential of 41.3% last time. A wider gap is likely now.
  7. Australian rate decision: Tuesday, 4:30. Given the surprising rise of consumer prices in Q1, and the tendency of Glenn Stevens to surprise the markets, a rate hike to 5% cannot be ruled out. The consensus is for another month of unchanged rates at 4.75%. In such a case, the Aussie will mostly move by the accompanying statement. A bullish tone hinting future hikes will push the Aussie even higher, while concerns will send it lower.
  8. AIG Services Index: Tuesday, 23:30. The second figure from AIG is more important, and relates to the services sector. Contrary to the manufacturing sector, a month of growth hasn’t been reported for a long time. The last release printed a drop from 48.7 to 46.5 points. A rise is likely now, but not above 50.
  9. Retail Sales: Thursday, 1:30. Australian consumers are steadily increasing their spending, showing confidence. The last two months saw accelerated growth, reaching 0.5% last month. Another acceleration is likely now – 0.6%.
  10. Building Approvals: Thursday, 1:30. This is one of the most volatile indices. The last two months saw big dives. So now, a correction is expected in the number of approvals, 5.2%. The housing sector was hit by the rate hikes.
  11. AIG Construction Index: Thursday, 23:30. The last indicator from AIG is the worst – deep contraction has been reported in the construction sector according to this publication. From last month’s 39.4 points, a correction is likely now.
  12. Monetary Policy Statement: Friday, 1:30. Last but not least, the central bank will release an in-depth forward looking report regarding the economy and especially inflation expectations. The tone of this report has a strong influence on the Aussie for weeks to come.

AUD/USD Technical Analysis

The 1.0775 line (discussed last week) first served as tough resistance. After it was broken, it quickly switched to support, in a perfect move. 1.0850 had the exact same behavior. It eventually closed at 1.0969, looking towards the round number of 1.10.

Looking up, the round number of 1.10 serves as immediate resistance. The last time that these levels were seen were back in the 70s, when the currency didn’t float. Possible further resistance may be found at 1.1150. This is unchartered territory.

Looking down, the 1.0850 line now turns into support. It worked well in both directions now. 1.0775 is another important cushion on the way down.

Moving lower, 1.07 is only a minor support after working as such in the past week. Much more important support is found at 1.0580, which capped the pair two weeks ago very stubbornly.

Further below, 1.05 is now minor support, after being broken just now. It’s followed by 1.04, which worked as support for another week.

Even lower, we encounter 1.0315, which was a stepping stone for the Aussie on the long road higher, and is now only minor support.  It’s followed by the important cushion of 1.0254, which was the peak of 2010.

I turn from bullish to neutral on AUD/USD.

The US dollar has room for falls after Bernanke. The Aussie has all the reasons to rise – a strong trade partner (China), a high interest rate, a strong economy and now even rising inflation. But why am I neutral? The Aussie made a huge move upwards, and may need a week of consolidation before it makes the next moves. It had such time a few weeks ago. A rate hike in Australia can of course send the Aussie shooting higher.

FX Tech Strategy sees the Aussie challenging higher prices.

Further reading:

 

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