AUD/USD Technicals Bullish, but Fundamental Risks Elevated

The AUD/USD pulled back in slow holiday trade last week, but the longer-term uptrend off the late January low remains intact. A few weeks ago, we discussed two clear patterns on the daily chart that both projected a target at the .9500 handle (see “AUD/USD: Clear Sailing to .9500?” for more). Rates have yet to reach that level, but the technical picture remains generally constructive; the biggest near-term question mark comes from the Aussie’s fundamental backdrop.

Tackling the technicals first, the AUD/USD appears to have broken back above last week’s falling wedge pattern.Though it’s created from a series of lower lows and lower highs, a falling wedge is actually a bullish pattern as it shows declining selling momentum on each additional thrust lower. Last week’s drop only represented a 23.6% Fibonacci retracement of the previous rally, showing that buyers remain in control of trade from a longer-term perspective.

At the same time, the secondary indicators are also supportive of further gains. The MACD has crossed back above its signal line and is nearing the key “0” level, showing a clear shift toward bullish momentum. Meanwhile, the RSI managed to hold above the 40 area throughout last week’s dip; as long as the indicator continues find a floor in that area, the longer-term uptrend remains intact.

Source: FOREX.com

At this point, the biggest concerns for AUD/USD bulls come from the growing fundamental headwinds to further gains. During today’s Asian session, the Australian Treasurer Joe Hockey personally contacted the RBA toexpress displeasure at the central bank’s shift to a more neutral policy stance. Hockey indicated that the rise in the Australian dollar is exacerbating the country’s budget challenges. While central banks place tremendous value on their independence from government influence, the rumblings from the Abbot government add to a growing chorus of concern with the Australian dollar’s recent rise.

To that end, the data released during tomorrow’s Asian session will be critical for the near-term direction of the AUD/USD. First, the Australian Bureau of Statistics will release the Q1 CPI inflation figures, which may approach the top of the RBA’s target range – for more on this data release and its possible implications for the AUD/USD, see my colleague Chris Tedder’s note from earlier today.

In addition to the inflation data, traders will also see the HSBC Flash Manufacturing PMI report from China, Australia’s biggest trading partner. These figures are likely to come in below the 50 boom/bust level for the fourth consecutive month, with current forecasts centered on a reading of 48.4. Thus far, the Aussie has been able to shrug off concerns about slowing Chinese growth, but as long as these concerns linger, the Australian dollar’s rally will be vulnerable.

If both the inflation and Chinese manufacturing data come in strong, the AUD/USD could recover back to the .9440 level or even to the longer-term technical targets at 9500, but rates will likely struggle to break conclusively through that psychological ceiling on a sustainable basis. Meanwhile, weak reports during today’s Asian session trade could take the pair back down toward last week’s lows near 9300 next.