AUD/USD consolidates close to 0.7200 ahead of US data as bears eye test of 0.7100 support

• AUD/USD is consolidating around the 0.7200 level aided by decent Asia PMIs as it awaits key US data reports.
• The pair is vulnerable to further selling from a technical perspective, with bears perhaps eyeing a test of 0.7100.

After Monday’s tumble as a result of broad USD strength, but also likely some technical selling pressure, AUD/USD has regained some composure on Tuesday and is pivoting either side of the 0.7200 level. Market commentators are citing strength in China coal prices (a key Australian export), as well as a positive Chinese Caixin Manufacturing PMI survey, which was better than expected at 50.9 in December versus 50.0 forecasts, as supportive of the Aussie. More broadly, ASEAN manufacturing PMI rose to 52.7 from 52.3 in November, indicate of broad economic strength in the region. With AUD/USD up 0.1% at current levels close to 0.7200, the currency is amongst the best performing G10 currencies on the day.

However, aside from a big drop in the yen to multi-year lows versus the US dollar amid catch up to the recent move higher in US (and global) yields), FX markets are tame on Tuesday. Currency traders are awaiting US ISM manufacturing PMI (Deceber) and JOLTS Job Openings (November) data at 1500GMT, ahead of the release of the ISM services PMI and official labour market report (also both for December) later in the week. Note that the Australian manufacturing PMI for December was also released during Asia Pacific hours, with the headline index easing to 57.7 from 59.2 in November.

IHS Markit said that “Some growth momentum was lost for the Australian manufacturing sector in December as the reopening boost faded and supply constraints hampered production according to panellists”. “That said,” the report continued, “current growth momentum remains strong by historical standards and firms have maintained an optimistic view with regards to future output”. The Aussie did not pay any attention to the latest PMI report, just as it has ignored the fact that Covid-19 hospitalisations have in recent days surged to record highs in parts of the country. Traders are betting that there will not be further lockdowns in Australia, given that government authorities seem currently to believe that high vaccination rates will prevent widespread serious illness.

With AUD/USD having recently broken to the south of a short-term bullish trend channel, the scope for further technically driven losses is high. Short-term bears may way target a test of mid-December lows in the 0.7100 area, should the 0.7200 level go. From a technical/quantitive perspective, there is plenty of room for selling pressure to build; the 14-day Relative Strength Index is at a comfortable 49, well above the “oversold” 30 level. Meanwhile, AUD/USD’s Z-score to its 200-day moving average is currently around -1.0 (meaning it is roughly one standard deviation below its 200DMA). Typically a Z-score to 200DMA of lower than -2.0 is an indicator of “oversold” conditions.