AUD/USD Forecast: Could drop to 0.7520 ahead of Friday's Non Farm Payroll

AUD/USD recovered slightly from fresh nine day lows and regained 0.76 handle during the European session. The Aussie keeps losses amid falling commodity prices and persistent strength seen in the US dollar against its major peers. AUD/USD has lost nearly 4% since March 24 peak at 0.7490 levels as the greenback continues to outweigh the Antipodean. AUD/USD currently trades around 0.7600 levels, recording a -0.70% loss on the day, bouncing-off fresh nine-day lows scored at 0.7591 levels.

The pair is seen extending losses for the fifth straight session in running and could drop to 0.7520 levels before Friday’s US non-farm payrolls data as -

• Broadly stronger US dollar:

The US dollar poses a solid recovery against its major competitors from March 25 low of 96.31 levels. The dollar index which measures the relative strength of the greenback against the basket of six major currencies currently stands at 98.76 and attempts another run above 100 marker reached earlier this month. The US dollar remains supported following release of latest batch of upbeat US macro releases viz., US Q4 2014 GDP, consumer sentiment, Core PCE, housing data and so on, which has surprised markets on the upside, topping market estimates. The solid US economic data signals that the US economic recovery is back on track and re-ignites expectations of earlier Fed rate-hike. Further, the recent hawkish comments from the Fed Chair Yellen stating that Fed rate lift-off could be sometime this year also keeps the USD underpinned.

• China growth woes:

With China’s manufacturing sector activity lowest in 11-months and industrial profits dropping to worst in 2 years, the Chinese economy continues to show further signs of slowdown. The fragile economic recovery once again raises concerns over external demand from the world’s largest consumer and hence weighs on the Aussie. China is Australia’s top export destination. Recently, China's industrial profits dropped by 4.2% in Jan-Feb, it is steepest fall since 2012. The HSBC Flash China Manufacturing PMI for March fell to 49.2, compared with 50.7 in February. China's CPI rose an annual 1.4% in February, it’s still much lower than the price growth China has experienced over the last decade, which reached almost 9% at one point.

PBOC Governor Zhou Xiachuan warned that China is not exempt from the risks of deflation. "Inflation in China is also declining. We need to have vigilance if this can go further to reach some sort of deflation or not," 

• Expectations of Reserve Bank of Australia (RBA) further rate cut:

AUD/USD remains pressured largely as markets are now pricing-in increased possibilities of further rate cut by the RBA either in its April meeting next week or in its May policy meet.

Chief Economist at Westpac notes that, "Since the March meeting we have argued that the cash rate is certain to be eased by 0.25% in the April/May “window” while retaining an “April bias”(analysis of RBA’s rate decision following the March meeting.)"

"We are comfortable to continue to expect a rate cut next week of 0.25% to be followed by a period of stability marked by a clear easing bias."

Also, Chief Australia & New Zealand Economist at Capital Economist believes that, "Regardless of whether the Reserve Bank of Australia (RBA) cuts interest rates from the current rate of 2.25% to 2.00% at the April or May policy meeting (we slightly favour a move at the meeting on Tuesday 7th April), the main point is that this is unlikely to mark the end of the loosening cycle."

• Falling commodity prices:

The Aussie remains highly vulnerable to the recent slump seen in the commodity space, with the fall in crude oil and iron-ore exacerbating the pain. Crude oil an iron-ore prices have plunged nearly 5% and 7% respectively since yesterday. Iron-ore is Australia’s top export product. Moreover, declining gold and copper prices also added to the losses in the natural resources-linked Australian dollar.

Technically, AUD/USD continues its descent in the short-term downtrend channel, with further room for declines as the daily RSI standing at 39.63 aims sharply lower in to the bearish terrain. AUD/USD is likely to extend losses and drop to 0.7520 levels ahead of US NFP figures given the unfavourable macro fundamentals surrounding the Aussie. The pair may find a strong support at 0.7560 levels and selling pressure may intensify below that level dragging the pair to test 0.7520. In case of a failure to breach 0.7560, AUD/USD may rebound sharply and swing back higher for a retest of 0.77 handle and beyond. Overall, a short term downtrend persists in AUD/USD so long as it remains below 0.77.