What you need to know before markets open: AUD technically precarious, fundamentals are balanced

There has not been a great deal happening over the weekend since Friday's positive close on Wall Street, and we remain in a period which typically makes for thin trading, erratic price action and/or dead zones.

However, there are compelling news-reads out there in the geopolitical fundamentals, and from a technical standpoint in the FX space, there is plenty to analyse on the charts where, in some cases, G10's have moved to irresistible levels – spoiler alert: AUD/USD. 

• Chart of the week: AUD/USD testing bullish commitments at critical resistance area

First of all, a quick recap of last week's holiday trading as well as notes from Friday's close:

US dollar bears in control, looking to a 78.6% Fibonacci retracement target in 96.60s

The laggard was the US dollar. Following an outsized bearish pin-bar on Christmas day, the US dollar index, DXY, dropped to test the 97 figure again with a lof of 96.92. The outlook, from a technical basis, remains bearish for the week ahead with the price on Friday closing below the double bottom support levels of 18th Oct. and 1st Nov. lows of 97.12/10 respectively. A 78.6% retracement brings in the 96.60s as a downside target for the week ahead. 

The antipodeans, (NZD&AUD), were the top performers, eyes on trade headlines 

The Kiwi lead the way, extending in four days of consecutive higher highs and lows, meeting a 38.2% fino retracement of the late July 2017 YTD range and major resistance at Feb 2019 lows in the low end of the 0.67 handle. 

AUD/USD is one of the more compelling plays into year-end. AUD has reached the vicinity of the top of a rising channel while trading above the 200-day moving average. Bulls are closing in on the Jan 2018 - YTD 23.6% Fibo as well as prior support and resistance around 0.70 the figure. This is also a confluence of the 78.6% Fibo of the latest swing highs and lows between July's business and the start of October's. Fundamentally, AUD is flawed on a domestic basis although the Sino/US trade talks appear to be going well which are lending support to the antipode and the commodity complex as a whole. 
Speaking of 'holes', however, it all still feels oh-so precarious with respect to how long it will be until sentiment flips. It is whether the timing on a technical basis (strong confluence/resistance area around 0.7000) marries-up with such a flip in the trade headlines which makes this trade so compelling. 

There has been no mention of a firm date for the signing ceremony which news has been a positive driver of markets over the last week or two (US stocks to all-time highs/commodities bid) and there are plenty of contentious differences that remain which could flare-up at any time which makes for a bleak outlook. As such, the sentiment should be traded with extreme caution. 

"The two sides are expected grapple with thorny issues such as structural reforms, especially with the US presidential campaign on the horizon next year,"

the South China Morning Post argues. 

Weekend articles

• China to scrap benchmark lending rate in shift to new system – Bloomberg (Could arguably be a positive factor for AUD for the open).

• China ‘will honour’ US trade war deal promises as talks progress ‘in earnest’ – SCMP  (The title is bullish for AUD in the open as a concern is China will not honour deal promises).

• US strikes in Iraq, Syria target Iranian-backed Shi'ite Muslim militia group – Reuters (Bullish for oil prices this week).

Week ahead - US/Sino trade deal dominates in an undertone of risk-on despite data

For the antipodeans and the US dollar this week, markets will scrutinise the Chinese data on New Year's Eve first of all. We have Manufacturing PMIs (Dec) for Official and Caixin. "The announcement of the US-China trade deal and elimination of the December 15 tariffs bodes well for manufacturing confidence. Similarly, credit and loan metrics have taken a turn for the better, while construction activity is picking up and auto sector output volumes are rising. There are also signs of a nascent recovery in the tech sector," analysts at TD Securities argued. 

Then, on the 3rd January, we have the ISM Manufacturing (Dec). "We will review our ISM forecast after more regional surveys are released, but we expect the US-China trade deal to lead to a less negative tone in the report. The report will likely reflect a mixture of pre- and post-trade-deal-announcement responses; the deal was announced on December 13. That said, we don't expect the deal to lead to a dramatic change," analysts at TD Securities explained.