The interplay of a robust US dollar and a prolonged selloff exerted additional pressure on the Australian dollar. In yesterday’s report, I observed that correlations between AUD/USD, the Nasdaq, and the US Dollar Index had re-emerged — and Monday certainly validated this observation. The US Dollar Index has shown a resurgence in bullish momentum as we approach the release of US economic data this week. The nonfarm payrolls report for September is anticipated to be released at an undetermined time, though it will not include the unemployment rate. Upcoming releases include August data for construction spending, factory orders, and international trade. Hawkish comments from Jerome Powell at the last FOMC meeting, along with mixed views from other Fed officials, have traders on high alert for stronger-than-expected economic prints and lower odds of Fed cuts — lifting the US Dollar Index to a three-day high, marking a prominent swing low on Thursday and rebounding back above 99.
The USD index has successfully closed above its 200-day SMA and 200-day EMA, indicating a potential breakout from a correction and a return to its upward trajectory following the September low. Nonetheless, as discussed in previous articles, I am anticipating the conclusion of wave C and the continuation of a more significant bearish trend. It appears that wave C may have already reached 100.215. Additionally, consider the August high and the 100 handle as possible resistance levels for bears to reassert their dominance. If bulls push the US dollar above the November high, it sets the stage for a move towards the 101 handle, where the possibility of revisiting the end of wave C arises. This action would undoubtedly indicate challenges for AUD/USD. Given the elevated correlations between the US dollar, Wall Street, and the Australian dollar, traders in the AUD/USD pair should remain vigilant for potential volatility.
In yesterday’s weekly outlook, I expressed my expectation for a bullish week for AUD/USD, indicating that any dips are expected to be shallow and likely to attract buying interest. The Aussie’s -0.7% decline on Monday is already challenging that outlook, and with a scarcity of domestic data, its trajectory for the week is heavily influenced by sentiment towards the US dollar and Wall Street. The 1-month implied volatility level for AUD/USD has increased to a 22-day peak of 8.2% annualised. Risk reversals experienced a slight decline, indicating that puts (bearish bets) were increasing in relation to calls (bullish bets) over the 1-week and 1-month periods. If sentiment continues to deteriorate, risk reversals may decline in tandem with AUD/USD.
The daily chart indicates that AUD/USD has closed below its 200-day EMA at 0.6497, following a decline from its monthly pivot point at 0.6537. The October close-low at 0.6469 serves as the next significant support level for bearish traders to focus on. However, a confirmed break would probably necessitate ongoing weakness on Wall Street and a resurgence in the US Dollar Index, considering the strong correlations at play. A decline below 0.6469 reveals the 200-day SMA at 0.6454 and the swing low at 0.6440, coinciding with the monthly S1 pivot. If bulls regain momentum, the 0.6520 resistance zone and the monthly pivot emerge as the next logical upside targets. The ability of those levels to break will be heavily influenced by forthcoming US data and evolving expectations from the Fed.