On Monday, the Australian dollar attempted a recovery but struggled to gain traction. The AUD/USD pair has been influenced by China’s commodity sentiments for months, amplifying the volatility in both areas of trade. However, Friday’s non-farm payrolls (NFP) report forced a reassessment: U.S. employers added 172,000 jobs compared to an expectation of 85,000, and there was a substantial revision of about 93,000 upward from the previous month. The unemployment rate remained steady at 4.3%. As a result, the dollar reached a two-month high, causing the Australian dollar to drop to approximately $0.7050, its lowest level since mid-April, before the Asian trading session commenced. The attempt to rebound seemed to falter at this price level, resembling more of a short covering than a display of confidence.
The product’s support is broken
The hope was that strong iron ore prices and a stable China would keep Australian stocks undervalued despite dollar fluctuations. Unfortunately, that support seems to be thinning out weekly. Iron ore has been around $105 a tonne for a large part of the year, but the demand situation appears to be diminishing. China’s steel production in April marked its lowest figure for the month since 2018, dipping nearly 3% year-on-year, likely due to the struggling real estate sector. Factories are leaning on existing inventory rather than new imports, resulting in a quiet decline in demand that only becomes apparent in pricing when it’s too late. This backdrop isn’t favorable for a currency that effectively serves as a proxy for China’s economic liquidity.
Upcoming trade and import/export statistics for May from China, due on Tuesday, should provide initial insight into whether import rebounds are gaining momentum. Also on Wednesday, China will release its inflation figures: the Consumer Price Index (CPI) is still flirting with deflation, while the Producer Price Index (PPI) is anticipated to rise to 3.8% year-on-year. However, this is not necessarily indicative of a real demand uptick; increased factory prices driven by rising commodity and energy costs often signal cost-push inflation rather than the demand growth Australia truly needs, particularly since steel production and real estate remain lackluster. Any figures released might not be enough to bolster the currency on their own.
The real catalyst is the American, not the Australian
Domestically, the calendar is rather uneventful. The Westpac Consumer Confidence Index and National Australia Bank (NAB) Business Confidence Survey are set for release on Tuesday, followed by consumer inflation expectations on Thursday. However, none of this data is likely to move major currency pairs significantly. The critical impact is coming from Washington. Headline U.S. CPI is projected to reach 4.2% year-on-year on Wednesday, largely driven by energy price shocks from the Middle East, even as core rates hover near 2.9%. These headlines can directly influence the already hawkish monetary policy adjustments taking place. Currently, there’s a 72% chance of a rate hike by December, a notable shift towards tightening rather than loosening, which places high-beta currencies like the Australian dollar at risk.
Crude oil prices are experiencing a mixed trajectory. Brent crude spiked over 5% early Monday after tensions between Iran and Israel, then eased as both nations paused, with WTI stabilizing around $91. Rising energy prices tend to support the dollar through inflation channels, but they don’t do any favors for Australia.
Upside, downside, bias
The daily Stochastic Relative Strength Index (Stoch RSI) is showing an upward trend from oversold levels, confirming Monday’s modest bounce. Still, the 200-period exponential moving average (EMA) on the daily chart remains significantly below, around 0.6900. Resistance appears at about 0.7100, with a more substantial supply zone around 0.7150. On the downside, the 0.7000 mark is a crucial support level; a clean break could open the door to 0.6950.
The overall bias leans lower. This scenario favors selling into any rebound toward 0.7100 instead of chasing upward movements. The U.S. CPI data on Wednesday will either confirm the dollar’s strength or provide some relief for Australia. Until then, support from China seems more ornamental than substantive.
