Weekly Recap and Outlook for AUDUSD - 7/26/2010

Written by ForexTraders.com on July 26, 2010 at 4:29 PM ET

AUDUSD gained considerable ground last week as renewed appetite for risk returned to the markets. The pair began the week trading off of its weekly low of 0.8632 made on Monday before rallying ahead of the RBA's Monetary Policy Meeting Minutes for June to be released the next day. The minutes confirmed that the RBA is committed to controlling inflation, stating that "headline inflation is expected to rise", and that "the important question for the board at the next meeting would be whether the new information materially changed the medium term outlook for inflation". This gave rise to speculation of a further RBA rate hike, possibly as soon as the next RBA Monetary Policy meeting on August 3^rd and focused attention on the upcoming CPI data for Australia due out this week.

On Wednesday, AUDUSD declined as the Westpac Bank-Melbourne Institute leading index of economic activity rose 0.2 points in May. The rate then resumed rallying on Thursday after U.S. Fed Chairman Ben Bernanke's negative comments on the U.S. economy and despite the NAB Quarterly Business Confidence indicator coming out at 3 versus a much higher previous reading of 17, indicating the pessimism in Australia's business sector.

Friday saw AUDUSD make its weekly high of 0.8970 as Australian Import Prices increased by 1.9%, which was considerably better than the 1.0% expected. The pair then went on to close at 0.8969 on Friday, up a whopping 3.1% for the week.

Fundamental Outlook for AUDUSD

The primary market-moving economic data releases and policymaker speeches scheduled for this coming week in Australia and United States are as follows:

Australia:

The economic calendar coming up in Australia is rather quiet, but does have some important releases scheduled. The week features the key Australian CPI inflation data due out on Wednesday that may prompt further interest rate hikes by the RBA if it exceeds their target.

Monday starts the week with the release of Australian PPI (1.5% q/q), while Tuesday offers the CB Leading Index (last 0.1% m/m).

Wednesday has the highlighted Australian CPI (1.0% q/q) data scheduled for release, along with the Trimmed Mean CPI (0.8% q/q). Thursday is quiet, but on Friday look for Private Sector Credit (0.4% m/m) to end the week.

United States:

The upcoming week of economic data releases for the United States shows moderate activity, similar to the previous week, and offers some interesting data for forex traders on the U.S. economy. The U.S. economic calendar features Friday's key Advance GDP data.

The week commences on Monday with just New Home Sales (317K) due out. That is followed on Tuesday with the S&P/CS Composite-20 HPI (3.8% y/y), as well as the important CB Consumer Confidence index (51.5) and the Richmond Manufacturing Index (20).

Wednesday offers Core Durable Goods Orders (0.6% m/m), plus Durable Goods Orders (0.9% m/m) and the closely watched Fed Beige Book.

Thursday only has Initial Jobless Claims (456K) out in terms of notable releases, and Friday closes the week with plenty of action.

Releases on Friday include the highlighted Advance GDP number (2.5% q/q), plus the related Advance GDP Price Index (1.1% q/q) and the Employment Cost Index (0.5% q/q). Also out on Friday are the Chicago PMI (56.1), the Revised University of Michigan Consumer Sentiment survey (67.5) and University of Michigan Inflation Expectations (last 2.9%).

Technical Outlook for AUDUSD

On the technical front, AUDUSD rose initially last week to make yet another a new high within its recent corrective upwards trend at 0.8970. In doing so, it convincingly bested the 0.8870 high seen on July 14th as well as the key 61.8% Fibonacci Retracement level at 0.8883 of the down move from 0.9388 to 0.8066. The rate closed the week nears its highs at 0.8969, up an impressive +3.1% overall.

Furthermore, the rate's key 200-day Moving Average now comes in right around the closing price level at 0.8968. Its slope is now heading very slightly downward, after previously sloping positively. This gives a decidedly neutral medium term outlook for AUDUSD. Nevertheless, the rate's 14-day RSI indicator currently reads in the upper part of neutral territory at 66, and it continues to support corrective upward price action since it has been demonstrating an overall upward trend since the May 20th low of 0.8071, including at the most recent 0.8970 high.

From an Elliott Wave perspective, the initial three wave upward move that ran from 0.8066 to 0.8858 seems like an A wave that has since corrected in a B wave to 0.8315, just under the key 61.8% retracement level of A at 0.8369. The current rally that has so far attained 0.8970 would then be the C wave in this scenario. Fibonacci projection ratios for this upward corrective move come in at 1: 1 = 0.9107, 1: 1.236 = 0.9294, 1: 1.382 = 0.9410, 1: 1.5 = 0.9503, 1: 1.618 = 0.9596, and 1: 2 = 0.9899. Also, this C wave has currently exceeded the key 61.8% retracement level of the down move from 0.9388 to 0.8066 at 0.8883, and a sustained break now argues for higher levels targeting 0.9388.

AUD/USD closed last Friday at 0.8969, just under resistance for AUD/USD at 0.8970. The charts also show resistance at 0.9077, 0.9134 and in the 0.9323/0.9388 region. Support is indicated at 0.8895, 0.8737 and 0.8632.

This overall scenario, while neutral in the medium term, still argues for further corrective upside potential in AUDUSD that may well be seen over the coming week. Traders following this upward move could watch the 14-day RSI for divergence versus the price on any new highs which could signal that the current rally is waning in strength.

Figure 1: Daily candlestick chart of AUDUSD showing its 200-day MA in red, Bollinger Bands in green, Fibonacci Retracement levels in royal blue, Trend Lines in purple and the 14-day RSI in the indicator box in pale blue.