AUD/USD Forecast: Coronavirus and RBA remain in focus as Aussie eyes the abyss

• AUD/USD has been whipsawed by the RBA and coronavirus headlines.
• A speech by the RBA governor, several Chinese publications, and US consumer data are on the list.
• Early February's daily chart is painting a mixed picture. 
• The FX Poll is pointing to gains in the medium and long terms. 

The Australian dollar initially benefited from receding fears about the coronavirus and upbeat statements from the central bank while ignoring weak data – only to flip back down and hit decade lows. Both topics in focus in the upcoming week.

This week in AUD/USD: RBA, coronavirus whipsaw

Is a coronavirus cure on the cards? Not so fast, but markets have seized upon medical efforts to develop or reuse existing medicine to cure the respiratory disease. The virus originating in Wuhan has taken the lives of hundreds of people, but financial markets are pleased with the immense efforts to contain the outbreak. The recovery of stock markets has helped the Australian dollar, a risk currency, recover. 

However, Australian Prime Minister Scott Morrison has warned of the economic damage from the disease, citing his country's high-dependency on the world's second-largest economy.

Nevertheless, Aussie traders seemed to lean more towards another policymaker – Phillip Lowe, Governor of the Reserve Bank of Australia. The RBA left its interest rates unchanged at 0.75% as expected, seeing the glass half full and especially content with the labor market. Moreover, Lowe spoke later on and seemed to play down the chances of further rate cuts. The RBA slashed borrowing costs three times in 2019. 

The central bank – and markets – seemed to ignore downbeat economic figures. Retail sales slipped by 0.5% in December, and the trade surplus fell short of expectations with only $5.22 billion. 

The Governor had the last word of the week when he presented the bank's Statement of Monetary Policy – where he sent the Aussie down by suggesting the RBA considered a rate cut. 

Moreover, the A$ succumbed to US dollar strength. A winning streak of robust economic indicators, from the forward-looking purchasing managers' indexes through productivity figures and culminating in job numbers all benefitted the greenback. The American economy gained 225,000 jobs in January, beating initial estimates.

Chinese economic indicators were satisfactory, but do not reflect the coronavirus outbreak. Caixin's Manufacturing Purchasing Managers' Index ticked down to 51.8 points in January, yet continues reflecting growth. The official Manufacturing PMI stood at 51.1.

Australian and Chinese events: Seeing the impact of the virus?

The coronavirus outbreak, also known as the Wuhanflu, is set to continue dominating the headlines for at least another week. Apart from the number of cases and the rising death toll, the global mood will likely be set economic developments. These include flight cancelations, the shutdown of plants in China, downgraded forecasts, and any hard statistics that may lower the level of uncertainty. 

The economic calendar provides some data, albeit partial. 

Chinese inflation figures for January kick off the week. Economists expect the annual Consumer Price Index to remain hot, driven by high pork prices. An unexpected drop – due to the coronavirus – may weigh on markets. 

Several Australian consumer figures are of interest, but the main event of the week is another speech by Governor Lower. The central banker may shed further light on the economic situation, primarily if he refers to the bank's response to the outbreak. 

China closes the week with top-tier economic indicators for January – Industrial Production and Retail Sales. Both figures may be skewed by a duo of factors – activity ahead of the Lunar New Year and the Wuhanflu. It will be interesting to see if markets will shrug off the data as messy or become more sensitive to any drop. 

Here the most prominent Australian and Chinese releases on the economic calendar:

US events: Further trade speculation, housing, PMIs

While US politics is fascinating with President Donald Trump's impeachment and the Democratic Party's primaries, markets will likely continue ignoring these developments. 

The economic calendar is centered on the consumer, starting with inflation figures. Energy prices have likely driven the headline Consumer Price Index level higher, but Core CPI – which is watched by the Federal Reserve – has probably slipped. Economists expect underlying inflation to have decelerated from 2.3% to 2.2% in January. 

The Retail Sales report for January carries expectations for rises in all gauges. Most importantly, the Control Group is set for another healthy advance of 0.4% after rising by 0.5% in December. 

An up-to-date look at shopping trends awaits traders at the close of the week. The University of Michigan's preliminary measure of Consumer Sentiment in February is set to remain near 100, representing an upbeat mood. 

Here are the top US events as they appear on the forex calendar: 

AUD/USD Technical Analysis

The Relative Strength Index on the daily chart is flirting with 30 – which indicates oversold conditions and implies a bounce. Bulls may also be encouraged that downside momentum is not at its worst. On the other hand, AUD/USD is trading well below the 50, 100, and 200-day Simple Moving Averages. 

The recent trough of 0.6675 remains a significant battle line. It is closely followed by the October low of 0.6665, and then by the January 2019 flash crash low of 0.6620 – which was momentary. More importantly, AUD/USD would fall to the lowest since early 2009 – the weakest in over a decade. 

Resistance is at 0.6720, which was a support line in October, followed by 0.6755, a low point in late November. It is followed by 0.6785, February's high. The next lines to watch are 0.68, 0.6845, and 0.6860, which is the confluence of the 100 and 200-day SMAs.

AUD/USD Sentiment

While the Aussie may respond to oversold conditions with a bounce, the fresh dovishness by the RBA and the coronavirus outbreak – which is far from over – may continue weighing on AUD/USD. 

The FX Poll is showing a bearish trend in the short term but a robust recovery afterward. Do experts think the sell-off is exaggerated? Perhaps, yet the average targets have been downgraded in the past week.

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