Friday’s “risk-on” rally, triggered in part by those strong US employment figures, followed through on Monday as Asian shares and U.S. index futures rose. Although Europe was also higher at the open, some of the major indices such as the German DAX gave up their earlier gains as investors considered the impact of U.S. import tariffs on metals and how this may impact European companies and their profits.
In forex, the likes of the euro/U.S. dollar (EUR/USD) currency pair and the British pound/U.S. dollar (GBP/USD) have gained further ground, although it is the commodity currencies that have made the most progress against the dollar – none more so than the Aussie. It is the market’s response to news which is sometimes more important than the news itself.
So when a strong U.S. jobs report couldn’t lift the dollar on Friday, the reserve currency was always going to struggle the next session and so it has proved so far today. But given the recent bullish trend for the dollar, this could just be a mere pullback before the greenback appreciates further.
Aussie boosted by risk-on rally ahead of RBA, GDP
The risk-sensitive Aussie has been boosted by the rallying equity markets while retail sales data from Australia also beat expectations overnight. What the Aussie does next will depend in part on the direction of metal prices, trade dispute between the US and China (with the latter being Australia’s largest trading partner) and fundamental events out of Australia this week. The Reserve Bank of Australia will be making a rate decision on Tuesday while GDP data for the first quarter is due for release on Wednesday. Australian trade figures will come out on Thursday, a day ahead of Chinese trade numbers on Friday. The Australian economy is expected to have expanded by 0.8% between January and March, following a 0.4% expansion in the fourth quarter. To us, this looks a bit optimistic and a disappointment could be on the cards, which could derail the Aussie’s rally. As far as the RBA is concerned, well it won’t have much of a decision to make and policy will mostly likely be kept unchanged for a record 20th month. Inflation and wages remain stubbornly low, so it could be a while before the RBA turns hawkish again. This also poses a risk to the AUD/USD’s latest rebound.
AUD/USD rallies to hit key resistance
We last looked at the AUD/USD exactly two weeks ago in THIS report in which we highlighted a bullish reversal pattern around the psychologically-important 0.75 level. The AUD/USD took its sweet time but has finally broken higher and today’s rally has lifted it all the way to the next trouble area around 0.7655-70. This resistance area could potentially provide a ceiling until the RBA or GDP are out of the way. If it does hold price down then we may see a pullback to the point of origin of the breakout around 0.7570-0.7590 next. However, if the breakout is sustained and price closes decisively above 0.7655-70 resistance then the rally may continue towards the next resistance at 0.7745/55 next – this is the point of origin of the last breakdown and the 200-day moving average.