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The AUD/USD and other risk-sensitive assets will be in focus this week as risk aversion remains the key theme following last week’s sell-off in markets such as equity and crude oil. We have already seen further deterioration in US index futures following yet another downbeat session in China overnight. Without any fundamental stimulus to trigger a change in the mood, this could be another volatile week for risk assets. If so, the AUD/USD could be in trouble.
 

What is the key theme this week?

Last week, the main theme in the market was weak data vs. hawkish central bank rhetoric. Let’s see if that changes much as markets have become more volatile again. The case for another 25bps Fed hike has grown and could gather pace should the Fed maintain its hawkish rhetoric. We also have heads of ECB, BOE and BOJ all speaking on Wednesday. From a macro point of view, German CPI on Thursday and Friday’s release of US core PCE should be interesting to watch. We will also have inflation data from Canada on Tuesday and Australia on Wednesday. Some of these events could impact the RBA rate decision next week, with another 25 basis point rate hike being priced in.

Here are the key macro events on the economic calendar that could impact the AUD/USD this week:

Why are markets struggling?

In short, because of raised concerns that the actions of central banks will create a hard landing for a global economy already reeling from the impact of high prices. This is reflected with yield curves being inverted, crude oil falling despite OPEC cuts and equity markets, particularly in China, remaining weak.

Last week, nearly all the latest global PMIs came in weaker, with manufacturing remaining in contraction territory and in most case deteriorating. The subdued economic activity has investors worried that recession is looming large. Today’s release of German Ifo (88.5 vs. 91.5 last) raised those concerns further and saw the German DAX index to its lowest point of the month.
 

AUD/USD technical outlook

There are many candidates for this week’s chart of the week, including the USD/JPY with Japanese authorities becoming increasing worried about the pace of the yen’s declines. But for me, the AUD/USD analysis is the one to watch after being last week’s biggest fallers among the majors.

The risk-sensitive AUD/USD pair fell hard last week, and more losses could be on the way with price trying to break the 200-day moving average.

(Click on image to enlarge)

Source: TradingView.com

With the AUD/USD closing well below the key 0.6800 breakout level last week, this points bullish failure and may precede further weakness this week. That failure undoubtedly hastened the sell-off last week. Similar price action was formed on the upside earlier this month, when the breakdown below key support at 0.6580 failed to show any downside follow through. At the time of writing, the AUD/USD was holding below the next support level around the 0.6700 handle and was below the 200-day average. A close below this level could pave the way for a run down to that 0.6580 level again.

The bulls will want to see a confirmed bullish reversal first, before potentially looking for long ideas – whether that comes in the form of a hammer or a double bottom etc. In any case, a move north of 0.6800 would be a significant bullish development.

But right now, the chart is look quite ugly following the failed breakout, so I favor looking for short ideas on this pair, than long.

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