AUD/USD probing 21DMA in mid-0.70s as rising equities/commodities & PBoC rate cut lift Aussie

• AUD/USD has bounced from an earlier test of 0.7000 and is probing its 21DMA around 0.7050.
• The Aussie is getting tailwinds from global equity and commodity markets plus yuan strength after a surprise PBoC rate cut.
• AUD remains vulnerable if risk appetite sours/USD turns higher again, with Fed minutes and key US data out next week.

A rebound in global equity combined with rising industrial metal prices in wake of the latest move by China’s PBoC to lower its 5-year Loan Prime Rate, which should boost the country’s struggling property sector and, incidentally, has put the yuan on course for its best week this year, is benefitting the Australian dollar on Friday.

AUD/USD found decent support earlier in the session when it dipped back towards the psychologically important 0.7000 level and is now back to consolidating close to its 21-Day Moving Average in the 0.7050 area, up about 0.15% on the day. The 21DMA has been a key level of resistance in recent weeks and a break above it could set the stage for a push above 0.7100 and even on to the next key area of resistance in the upper 0.7200s (the 50 and 200DMAs plus this month’s high).

If sentiment about the Chinese economy continues to improve next week, a bullish break higher is certainly a possibility (be that from bets on more PBoC easing, lockdown easing or both). But a push higher in AUD/USD would likely also rely on continued US dollar weakness, as has been seen over the past few days.

While the DXY has pulled back over 2.0% from last week’s highs above 105.00 and is in the upper 102.00s, dips have consistently been good buying opportunities in recent weeks amid the Fed’s hawkish shift and ongoing evidence of high inflation and a tight labour market. This has not only supported the buck but also hurt risk appetite, dampening sentiment towards the risk-sensitive Aussie.

While AUD/USD is trading more than 3.0% above earlier monthly lows in the low-0.6800s, the pair is still down around 8.0% versus its early April highs. Fed tightening will remain in focus next week with more Fed policymakers speaking and the release of the minutes of the Fed’s meeting earlier this month (where they lifted rates by 50 bps and signaled more 50 bps moves likely ahead) on Wednesday.

US data in the form of the second estimate of Q1 GDP growth (recall the first estimate showed a surprise contraction in output) on Thursday and April Core PCE inflation figures on Friday will also be in focus. The data might underpin recent fears about stagflation that could further dampen risk appetite and weigh on the risk-sensitive Aussie.