It's Crunch Time For The Australian Dollar

Originally published by AxiTrader

The Australian dollar made a low around 0.7420 on Friday night before rallying to close a little higher near 0.7450. But it's still under pressure this morning at 0.7438 as traders await what looks like a crucial set of data releases this week in the lead up to the first quarter GDP release on June 7.

That data which includes retail sales, building approvals, CapEx, and credit is important in framing the debate and guiding expectations about just where this Australian economy is at right now.

That’s particularly important because the chance of a negative GDP print has pretty much come out of nowhere into the market’s consciousness. As at the last read Friday the Citibank economic surprise index for Australia was printing 34.4.

Chart

Now it's more than a little ludicrous to draw a trendline on this data series. But I wanted to highlight that the weakening trend in data - if that's what we get between now and June 7- will reverse the reality that at present the data is still doing a little better than forecasters have been forecasting.

That has supported the RBA's notion that growth is going to accelerate to potential this year. So any collapse in the data will feed through into price action for stocks and the Aussie dollar pretty quickly. Even after recent falls.

To a certain extent that has already happened as the net long Aussie dollar positions of speculative accounts have been reduced back to a neutral stance - as I highlighted earlier.

But equally the rally in Australian 10-year bonds relative to their US Treasury counterpart.

Chart

And the contraction in the Aussie/US 2 year bond spread highlights that there is a re-rating already happening in bond markets.

Chart

That has put pressure on the AUD/USD. But if the data does weaken as many now fear sellers are likely to redouble their efforts.

Looking at the AUD/USD chart at the moment it's clear the Aussie found support at the previous top/bottom zone which also coincided - roughly - with the top of the old downtrend channel the AUD/USD was in before last week's break and fail.

Chart

That means this 0.7400/20 region has to hold to avert a move to the 50% retracement level of the 2015-2016 rally - and recent low - around 0.7330.

Data will be important this week. Both here and how the US data - especially Friday's non-farm payrolls release - plays out. But it seems clear the the Fed is trading its forecasts not the "splutter" in data - as IMF chief economist called it over the weekend. And that means JUne is almost a lock for another 25 basis point rate hike from the FOMC.

Have a great day's trading.