The Australian dollar begins the week at a disadvantage following its lowest performance in six weeks relative to the US dollar. With the trimmed mean CPI set to be released mid-week, diminishing USD momentum, and market maintaining crucial support levels, AUD/USD is positioned for a potential volatility spike following last week’s significant selloff. The outlook is contingent upon two key factors: a subsequent Australian inflation report and the ability of US markets to stabilize following a surge in the US Dollar Index and increasing Treasury yields. Last week, the Australian dollar ranked as the second weakest major currency against the US dollar, as the bearish engulfing pattern on AUD/USD indicated its poorest performance in six weeks. Last week, the Aussie remained stable against the yen, but AUD/JPY declined for a second consecutive day on Friday, aligning with my short-term bearish outlook, and reached its initial downside target near the 20-day EMA (100.48). The currency maintained stability against the New Zealand dollar in anticipation of this week’s RBNZ meeting. However, its bullish trend structure and the possibility of a dovish 25bp cut suggest that any pullbacks are likely to be constrained for the time being. AUD/CAD has been trading in a sideways range between 0.905 and 0.920 for the last 10 weeks; however, momentum shifted upwards from the range lows on Friday.
The US Dollar Index achieved its highest weekly close in 27 weeks as traders continued to reduce their expectations regarding Fed cuts. The report, along with increased participation rates, led markets to disregard the minor uptick in unemployment to 4.4%. The FOMC minutes have dampened expectations for a December rate cut, while the jobs data contributed to the dollar reaching a new cycle high. The markets continue to be the primary influence on the Australian dollar, as evidenced by the 20-day correlation between the US Dollar Index and AUD/USD standing at -0.8, while the 10-day correlation is at -0.91. Considering that AUD/USD is influenced by the US dollar and overall risk sentiment, it is important to observe that indices continue to remain above support levels while the bullish momentum in the USD is diminishing. AUD/USD exhibited a slight bullish bar on Friday following a significant two-day selloff, suggesting a potential minor rebound at the start of the week before sellers may likely reassert control. Despite this, current trends indicate that the Australian dollar is likely to test the 0.6400 level. The outcome of whether it breaks below or generates a more robust reversal is likely contingent upon the trading behavior of US markets. Should my assessment hold true that Australia is poised to release another strong inflation figure on Wednesday, the potential for downside may be constrained — with the possibility of a rebound from 64c if risk sentiment strengthens.
The risk appetite, or its absence, from market is influencing the Australian dollar, evidenced by a 10-day correlation of 0.94 with the S&P 500 and 0.88 with the Dow Jones. The inverse relationship with the dollar, along with a robust positive connection to risk, has resulted in AUD/USD maintaining a close alignment with the New Zealand dollar, as evidenced by a 10-day correlation of 0.95 and a 20-day correlation of 0.89. The influence of China on the Australian dollar has diminished, as evidenced by the 20-day yuan correlation, which stands at a minimal 0.14, alongside a relatively weak 10-day correlation of 0.5. The trimmed mean CPI stands as the pivotal data point for AUD/USD traders this week. The RBA’s primary focus is on the quarterly release, while the ABS is set to publish the October monthly indicator, marking the initial assessment of Q4. This will influence projections leading into the January quarterly report, but an unanticipated weak outcome would be necessary to rekindle expectations for an RBA cut, considering the robustness of Q3 inflation. A strong print would likely reduce the likelihood of any cuts in 2026 and may increase speculation regarding a rate hike — although that is not my primary expectation at this time.
In light of recent developments, US consumer confidence continues to exhibit weakness, and inflation expectations have decreased according to the latest University of Michigan survey. Market participants will now focus on the Conference Board’s sentiment report, in conjunction with US GDP, producer prices, and PCE inflation, while expectations for imminent Fed rate cuts appear to be constrained. It is important to recognize that US Thanksgiving is expected to result in very limited trading ranges on Friday, with the possibility of some last-minute fluctuations — leading to potentially volatile and unpredictable price movements — on Thursday.