AUD/USD is poised for further downside, but not before a correction

AUD/USD ended the week on a sour note as volatility in markets remained problematic for the high beta Aussie currency which ended down in multi-week lows and a touch below 0.70 the figure. At the start of play today, the pair is inching higher back through 0.70 the figure in what could turn out to be a positive start to the week for the pair.

Despite a relatively large downside miss on November Nonfarm payroll jobs, the big 0.4% fall in the Unemployment Rate to 4.2% was encouraging for the US economy. Data there is going from strength to strength and the markets are expecting a faster pace of tapering and an announcement of the same from this month's Federal Open Market Committee meeting.  

A rapid tightening in the US labour market is one feature of the US economy that the Fed is mandated to promote. However, there is a renewed emphasis on stable prices following the Fed's chair's latest hawkishness. Fed Chairman Jerome Powell surprised markets last week by altering his previously consistent tone on inflation, telling US lawmakers at the Senate that “it’s probably a good time to retire that word (transitory) and try to explain more clearly what we mean.”

The Fed's inflation pivot could be also pivotal for US stocks and related markets, including the Australian currency that trades with high beta to the performance of global equities prices. We saw this last week, on Friday when equities didn’t like the stagflationary whiff to the jobs data. The S&P 500 closed off 0.8% and the Nasdaq down 1.9% while the Aussie broke to a fresh 13-month low at 0.6993.

RBA risks to AUD/USD

We have the Reserve Bank of Australia this week where any meanwhile correction in AUD/USD from the newly printed lows could come unstuck. This will be the last policy decision and statement before Feb 2022. The RBA is expected to keep policy settings unchanged at its last meeting of 2021. As such, the focus will again be on the wording of the Governor’s decision statement.

Traders will be looking for the assessments of the latest round of economic data, including the Q3 national accounts, and the shifting external environment, particularly with respect to price inflation in developed economies.

However, as analysts at Westpac note, ''the Bank’s following meeting, on February 1 next year, will likely see more meaningful shifts with a scheduled review of the bond-buying program expected to see purchases scaled back from $4bn/week to $2bn/week prior to a wind-down of the program by mid -May.''

Analysts at ANZ Bank concur with such a view considering ''a faster taper by the Fed could see the RBA end its quantitative easing program in February.'

However, ''Westpac remains comfortable with our view that the bank’s first move will come in February 2023 although markets are anxious for a mid-2022 move while the Governor himself is still open to waiting till 2024. 

As for positoning,rReal money managers on CME extended A$ net shorts to -78.4k contracts from -72.7k in wk to 30 Nov (spot 0.7127), their most bearish stance since Mar 2020. Leveraged funds extended to -23.4k from -10.7k. Combined position of -101.7k or -A$10.2bn is largest since at least 2006.

Really, how bad is Omicron?

Meanwhile, the Aussie could be prone to a correction if the market's volatility settles down at the start of this week. There have been no major headlines of the weekend that would be expected to move the needle, and if anything, there have been positive coronavirus updates with respect to the new variant, Omicron. The sentiment is that the new variant is not as harmful as past variants which could lead to the relaxation of newly deployed measures by governments to curb the spread of the Omicron. 

If the new hawkish tone from the Fed is now fully priced in, then there could be some further bleeding in the greenback to come which would be beneficial for AUD in the near term. 

DXY H1 chart

DXY is trading above the 200-EMA, but that could all change considering the bearish tendencies of the last couple of sessions' price action. The price recovered a 38.2% Fibonacci retracement of the prior hourly bearish impulse from trendline support.

If the bears engage in the opening sessions today, then the greenback could test bullish commitments at the dynamic trendline support. The 95.80s will then be exposed. Pressures could mount again if bulls daily to get the price back above what would be a new counter-trendline line resistance between 96 the figure and 96.20.

AUD/USD H1 chart

In such a scenario, where the dollar is offered at the start of the week, then AUD/USD can be corrected as follows by the bulls:

However, if the RBA is seen to be more dovish than expected, then the downside will open up again and there are at least 200 more pips to go until significant weekly support kicks in near 0.6780.