Australian Dollar May Pause Decline Amid Fed Uncertainty
The Australian dollar (AUD) has been on a four-week losing streak against the US dollar (USD), marking its fourth consecutive week of decline. However, recent developments, such as softer US payrolls and reduced expectations for a Federal Reserve rate hike in October, suggest that the AUD/USD downtrend may be losing momentum. The odds of an October Fed hike have dropped significantly from 70% to 22%, following dovish comments from Fed officials. The focus now shifts to the FOMC minutes and ISM services PMI, which could further influence market sentiment.
On the Australian side, there is little top-tier economic data expected this week, though the Westpac consumer confidence report will be watched closely. The August report indicated growing concerns about unemployment and interest-rate hikes, with all components of the sentiment index declining. This lack of domestic catalysts means that the US dollar and Fed policy will likely remain the primary drivers for AUD/USD in the near term.
Technical analysis reveals that AUD/USD has been retracing against most major currencies, though the degree of softening varies. For instance, AUD/CAD is experiencing a minor pullback but remains bullish, while AUD/EUR shows signs of an ascending triangle, potentially setting up for a bullish breakout. The US dollar’s strength has been a dominant factor, with AUD/USD holding a strong inverse correlation with the DXY index. Commodities, particularly the CRB Index, gold, and iron ore, also support the Australian dollar.
Futures positioning data shows that bears have been aggressively shorting AUD/USD, with large speculator and asset manager short exposure reaching record highs. However, there is still a significant level of gross longs, suggesting that the decline may not be an outright rout. Total open interest has stabilized, indicating underlying support despite the record gross shorts. Options traders have also increased their demand for puts relative to calls, reflecting heightened caution.