AUD USD in focus ahead of key data

The AUD/USD could be in for a wild ride as we progress towards the end of this week, for there will be plenty of macroeconomic data from Australia, China and the US to provide direction.

On Wednesday we’ve already had some mixed-bag data from Australia where building approvals – an important gauge for future construction activity – fell by a surprisingly large 6.9% in July following an upwardly revised 7.9% increase the month prior, while private sector credit grew by 0.6% in September. The AIG Manufacturing Index is due for release in the early hours of Thursday, followed by retail sales data on Friday which is expected to show an increase of 0.4% month-over-month in August.

But the key data for the AUD/USD will arguably come from the US and Australia’s largest trading partner, China. In the early hours of Thursday we will have the official Chinese manufacturing PMI, which is expected to have remained unchanged at 49.7 in September, while the Caixin PMI, which comes in slightly later, is likely to have been revised a little higher, to 47.2 from 47.0 initially. If the actual numbers deviate by a significant margin from the expectations then we could see a correspondingly sharp move in the Australian dollar.

Meanwhile from the US, we’ve already had one of this week’s most important macro numbers: the ADP private sector payrolls data. This showed that the world’s largest economy, excluding the government and farming industry, created some 200 thousand jobs in September, up from 186 thousand previously. The news has supported the greenback today, which has seen the Dollar Index rise for the first time in two days. The employment component of the ISM manufacturing PMI, due on Thursday, will offer the final clue for the official jobs data, which will be released on Friday.

Ahead of those key macroeconomic numbers, the AUD/USD has managed to bounce back a little, albeit it still remains in consolidation mode. It has been moving sideways inside a relatively tight range for the best part of the last five trading days or so, between 0.6940 and 0.7035. It has thus been oscillating between gains and losses around the psychologically important level of 0.7000.

But soon it could start moving more decisively in one or the other direction, in part depending on the outcome of the abovementioned data and the direction of commodity prices. Unless we see the return of the buyers in the next couple of days, the Aussie could be in for a big drop over the coming weeks now that the long-term bullish trend line appears to have been broken (see the monthly chart).

While the long-term bearish trend may be gaining more strength, in the very short term outlook traders should watch price action around the aforementioned 0.6940-0.7035 range closely, for a break outside of this range could lead to a sharp move in that direction which could last for several days.

If the breakout is to the upside then the Aussie could head towards the Fibonacci levels shown on the intra-day chart. Among these Fibonacci levels, the 78.6% retracement at 0.7205 is the most important as this was previously also a resistance level.  But for as long as the previous high of 0.7280 remains intact, the general bearish trend would remain valid. However, a break above this level could signal the start of a much larger correction.

Alternatively, if the AUD/USD breaks below support at 0.6940 then the next immediate stop could be September’s low of 0.6905. As the AUD/USD is trading near the 6.5-year lows, there won’t be much further horizontal supports below 0.6905, so the 127.2% Fibonacci extension level of the most recent rally at 0.6805 could be the next bearish target to watch in the case of a breakdown. The 161.8% extension level comes in around 0.6675, followed by the psychological levels of 0.6500 and 0.6000 – these being among some of the important longer-term support levels to keep an eye on.