With top notch catalysts coming out of Australia and China, this week’s strategies focused primarily on the AUD crosses.
Arguably we have 3 out of 4 right calls with the trend, however Aussie volatility has been limited this week as traders balanced weak Australian data against broad risk sentiment moves this week which has been heavily influenced by US debt ceiling deal developments.
Forex setup for the week: Australian dollar / US dollar Heading towards the bottom of the range – May 15, 2023
AUD/USD for 4 hours Graphics by TV
On Monday, we spotted a typical range pattern on the four-hour chart of the AUD/USD, where the pair is clearly in a strong bearish movement and is rapidly approaching the bottom of the range.
We cited first-order events from both China and Australia as potential triggers for AUD volatility, as well as a week full of Fed talk which could influence price action in the US dollar and broad risk sentiment.
With the pair breaking below the middle of the range and the Simple Moving Averages with momentum, our bias was to the downside Australian dollar / US dollar Until it reached the bottom of the range around 0.6580, with the potential for a rebound and resistance to retest above 0.6750 the minor psychological handle.
Volatility has decreased since that discussion as the pair appears to be stuck at 0.6600 – 0.6700. But overall, a bearish bias seems to be the dominant trend with lower peaks forming throughout the week, mainly with the help of the net bullish trend in the US dollar until Thursday.
British pound / Australian dollar: Tue – 16th May 2023
GBP/AUD: 2 hour forex Graphics by TV
On Tuesday we focused on GBP/AUD as a tight and tight calendar for the UK and Australia is a potential breakout setup in the making.
At the time of writing, the UK actually released a weaker-than-expected net jobs update and we said we’d be on the lookout for Australian jobs data which could be weak, and hopefully it lights up bullish momentum under the pair.
Well, the AU jobs data came in below expectations all around to cause some selling pressure on the Aussie, but it didn’t seem like it was enough to spark a strong directional move in GBP/AUD.
The lack of bullish momentum is likely due to the pound also making arguments to attract sellers, especially from comments from BoE Governor Bailey who said there are some indications that pressure on inflation from the labor market is easing.
On Thursday, momentum picked up in favor of the Aussie, likely due to risk sentiment turning positive thanks to positive headlines from the introduction of the US debt ceiling deal.
Overall, we were initially right with our directional strategy for the pair, but the volatility was muted due to conflicting fundamental narratives, largely keeping the pair at the same price as it traded on Tuesday.
Australian dollar / Japanese yen: Tue – 16th May 2023
Australian dollar / Japanese yen: forex for 2 hours Graphics by TV
We also spotted this consolidation pattern on AUD/JPY which matches well with the expected lift in Australian dollar volatility from Chinese data released on Tuesday.
The expectation on Chinese data was that markets were expecting stronger leading reports, which turned out not to be the case. China printed numbers below expectations with most data points, but improvements in some cases from previous readings.
This led to AUD/JPY weakness on Tuesday and Wednesday, which was quickly forgotten as broad market sentiment turned bullish on Wednesday after comments from US officials indicated a potential deal for the US to raise the debt ceiling and avoid a debt default.
In my post, I mentioned a scenario that “If the risk friendly trading environment extends into the next trading sessions, I would also be ready to trade the potential break-up and trade retest of the previous highs 91.80 or 92.50”.
We have already seen this happen with the broad shift to risk on Thursday, and it is likely to attract more JPY selling during the session. AUD/JPY rose accordingly, testing the 92.35 handle before finding a top.
Australian dollar / Swiss franc: Thu – 18 May 2023
Australian dollar / Swiss franc: forex for 2 hours Graphics by TV
On Thursday, AUD/CHF made it to the watchlist as the pair slowly faded after hitting the top of a textbook range on the one-hour chart.
I noted that the recent negative reaction from weaker-than-expected Australian employment data (which increases the odds of a pause from the RBA) and technical arguments could attract more short-term selling.
I also mentioned that the US debt ceiling problem and banking sector problems have kept safe havens like the Franc propped up, which could attract more bears on AUD/CHF if this scenario continues.
But the overall risk sentiment turned positive as the narrative around the US debt ceiling issue turned towards a potential deal as soon as this weekend, driving traders away from safe havens on Thursday.
This is likely why AUD/CHF returned to the top of the range on Friday, before selling pressure on US debt ceiling news came back again (GOP negotiators reportedly pulled out of deal talks).
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