Australian Dollar Forecast: AUD/USD Key Levels to Watch
AUD/USD Analysis and Talking Points
AUD/USD Underpinned by Softer USD & Equity Bid
A combination of a weaker Dollar and recovery in risk assets has underpinned the Australian Dollar in recent sessions with the currency back to 0.7150. This has largely been helped by recent comments from Fed’s Bostic who hinted at the potential of a Fed pause in September, should data permit. Now while this is noteworthy in the sense that this is the first Fed Official to signal the possibility of a pause, speculation of such action has been mild at best and of course, is very much data dependent. For now, inflation remains sticky and thus the bearish argument for the USD remains muted, the Fed will continue to be hawkish and have little desire to pivot away from this.
Core PCE In Focus
Looking ahead, today will see the release of the PCE and Core PCE Price Index, the latter being the Fed’s preferred measure of inflation. Core PCE is seen dipping to 4.9% from 5.2%, while the data is not normally a notable mover for markets, the market reaction will be depend on the deviation away from market consensus. Elsewhere, today is spot month-end (two days before actual month-end), which could see a bout of USD demand, prompting a modest pullback in AUD/USD. On the technical front, key resistance is situated at 0.7255-65, while support resides at 0.7040.
AUD/USD Chart: Daily Time Frame
EXPLAINER OF FX MONTH END REBALANCING
London WMR Fix (1600 London Time): The WMR Fix is one of the most widely used benchmarks for FX trading, taking place every day within a 5-minute window around 1600 London time. The fix provides a standard set of currency benchmark rates so that equity and bond investors can compare portfolio valuations and performance with each other.
The WMR fix tends to coincide with a sharp rise in trading volume, prompting a sizeable increase in liquidity. Occasionally, this allows for large real money flows to take place without causing too many distortions. However, flows can also be dominant in one direction (strong buying or strong selling) leading to outsized moves in a very short period of time.
The largest bout of volatility stems from the month-end fix, taking place on the last business day, where market extreme moves can often occur in the lead up during 15:00-16:00 London Time. These FX flows are derived from mostly equity rebalancing.
As such, if a UK portfolio manager holds US Dollar-denominated assets and seeks to hedge FX risk, then a monthly rise in the value of those assets will lead to more dollar hedging (selling the dollar). For example, if equities are FX hedged and US stocks (S&P 500) have risen on the month, while the FTSE 100 (UK stock market) has traded flat, then UK based investors would sell US Dollars against the Pound to add to their hedge, leading to an appreciation in GBP/USD. The greater the outperformance of US equity market over the UK would be associated with greater selling of the USD against GBP, prompting GBP to rise even higher. Although, extreme moves can often partially revert in the day following the month-end fix. That said, the occurrence of such event in a market as liquid as FX, suggests that the London fix (month-end fix in particular) is important for FX traders to watch for.