AUD/USD Forecast: likely to test 0.75 by Friday

AUD/USD resumed its bearish momentum below 0.76 barrier during the European session, after a brief spike seen in Asia, as traders now await US retail sales data which may stoke further upside for the greenback, drowning the pair to fresh cycle lows. Moreover, tumbling gold prices near two week lows also weigh on the resource-linked Aussie. Meanwhile, the US dollar treads water ahead of key US data with the DXY dead flat at 99.74. AUD/USD currently trades around 0.7575 levels, recording a -0.20% loss on the day, and so far down -1.36% on the week.

The pair is seen extending losses for the third straight session in running and could drop to new cycle lows at 0.7500 levels by Friday as -

1. Broadly stronger US dollar:
The US dollar extends its week-long run of gains versus its major competitors, hovering near fresh four week highs. The dollar index which measures the relative strength of the greenback against the basket of six major currencies currently stands at 99.76, posing a solid double bottom reversal on daily charts and rebounding to 100 marker. The US dollar remains supported following release of latest batch of upbeat US macro releases viz., US non-manufacturing PMI and employment claims.

While hawkish FOMC minutes release which showed that June might be more in the cards than markets are pricing continues to support a bid tone to greenback. Further, the recent hawkish comments from various Fed officials echoes that Fed rate lift-off could be sometime this year which also keeps the USD underpinned.

More so, the upcoming US retail sales data ahead of US open is also expected to be supportive of the US dollar as it may stage a strong rebound in March.

2. China slowdown worries:
The latest Chinese trade data reinforced strong beliefs that the economic recovery in the world’s second largest economy growth still remains in doldrums. Chinese exports tumbled 14.6% year-on-year in March after shooting up almost 50% in February, falling far short of the expected 9% gain. Imports were down 12.3% from a year ago in March, adding to the 20.5% decline in Feb. Trade surplus shrank to USD3.1 billion last March, the lowest since February 2014 when the trade balance was last in deficit.

Despite a slightly better than China CPI data, the Chinese economy continues to show further signs of slowdown amid China’s manufacturing activity lowest in 11-months and industrial profits dropping to worst in 2 years. China is Australia’s top export destination.

Further, the Aussie remains vulnerable after the World Bank has cuts 2015 China GDP forecast to 7.1% from 7.2% on its World Bank's East Asia Pacific Economic Update publication. Also, the World Bank said in its report that the slowdown in China will negatively affect Australia as lower prices for export commodities has effected investment in mining and weakened the Australian dollar.

In addition to the above factors, the Aussie is expected to face yet another blow from Chinese growth numbers due tomorrow with markets expecting China to report worst growth ever since the 2008 financial crisis. China’s GDP is expected to have expanded by 7.0% in Q1 2015, compared to Q1 2014 and witnessing a major drop from Q4 2014 7.3% rise.

3. S & P puts major minors in Western Australia on credit watch negative:
AUD/USD also remains pressured largely after some of the world's biggest iron ore miners in Western Australia were placed on "credit watch negative" by Standard and Poor's (S&P), as the price of the commodity continues to plunge amid a supply glut and soft Chinese demand. S&P's revisions came as Atlas Iron, a West Australian junior miner, said last week it would suspend mining operations "due to recent significant falls in the iron ore price."

4. Falling commodity prices:
The Aussie remains highly vulnerable to the recent slump seen in the commodity space, with the fall in gold, copper and iron-ore exacerbating the pain. Gold and copper prices have plunged nearly 2% and 3.5% respectively since yesterday. Gold prices dropped in today’s trade largely on expectations that the US macro data is likely to back the case for a sooner Fed rate hike. While, iron-ore continue to wobble around fresh decade lows of USD 47, having fallen by 60% over the past 12 months. Iron-ore is Australia’s top export product.

Technically, AUD/USD continues its descent in the short-term downtrend channel, with further room for declines as the daily RSI standing at 41 clinging to the trend line support. In the week ahead, AUD/USD is likely to extend losses and drop to 0.75 barrier given the concerns surrounding China and unfavourable macro fundamentals. The pair finds a strong support at 0.7550 (April 13 Low) levels and selling pressure may intensify below that level dragging the pair to test 0.7500. In case of a failure to breach 0.7550, 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.