AUDUSD bulls are wary of being stung by USD strength and/or AUD weakness

It has been an interesting session in Asia so far, with the US dollar losing ground against Asia’s traditional major currencies, the AUD, NZD and yen. The fundamentals of the US dollar haven’t changed since US markets went offline, but it looks like positioning in USD is driving the moves in Asia’s FX markets.

Meanwhile, the rally in AUDUSD is being supported by encouraging Australian business confidence numbers. NAB’s Business Confidence Index jumped to 3 in March from 0 in the prior month. The accompanying Business Conditions Index also improved in March, from 2 to 6. This improvement in confidence is despite the RBA resiting calls to lower the cash rate further last month and softer than expected growth numbers for Q4.

Forward looking indicators for the economy are providing some hope of a material recovery in non-resource parts of the economy, which is spurring business confidence. However, these green shoots are still very fragile and the broader economy, particularly the labour market, remains depressed. This is likely why the market isn’t getting overly excited about today’s figures.

There was a slight positive reaction from the Australian dollar to today’s figures, but it doesn’t materially change the market’s bearish outlook for interest rates in Australia. In fact, AUDUSD has barely made a dent in its post-China trade data losses. The pair was briefly able to break through a short-term resistance zone around 0.7620, but the bears didn’t let it climb too high.

On tap: China’s Q1 GDP and Australia’s employment numbers

Looking ahead, China’s Q1 growth figures, due to be released 0200GMT tomorrow, are a key event for Asia’s two major commodity currencies, AUD and NZD. The market is expecting the economy to have grown 7.0% y/y last quarter, after expanding 7.4% in 2014. This is in line with the government’s official growth target from 2015, but the economy may need more support from Beijing if it is to remain at this level. As we have explained in the past, the PBoC’s two interest rate cuts and one RRR cut have had minimal positive impacts on the real economy and have down little to restore faith in China’s struggling economy. Good thing there’s a lot more stimulus where that came from!

Another important event for the Australian dollar will be the release of labour market figures for March. The market is looking for a fairly uneventful report, with headline jobs growth expected to be 15K and the unemployment and participation rates are anticipated to remain at 6.3% and 64.6% respectively. Apart from these headline figures, it’s important to assess where the jobs came from; full-time employment trumps part-time employment in regards to assessing the health of the economy.

AUDUSD

The failure to break through 0.7620 illustrates a lack of confidence in AUDUSD in the near-term. Investors have been stung many times recently by false rallies in AUDUSD which have been undone by widespread USD strength or a multitude of fundamental weakness in the aussie. From a technical perspective, AUDUSD isn’t giving off strong bearish or bulls signals, although a break of 0.7550 may encourage another mauling. On the upside, we’re watching a resistance zone around 0.7740/50; a break there may negate a possible bearish head-and-shoulders patter in price.