The RBA meets on Tuesday this week.  After raising rates by 25bps in May, the Reserve Bank of Australia hiked rates by 50bps at the next four consecutive meetings to bring the cash rate to 2.35%.  The committee said that they expect to increase interest rates further over the coming months, but also said that it is not on a pre-set path.  The pace of rate hikes will be led by incoming data.  Earlier today, Australia released the TD-MI Inflation Gauge for September which showed that inflation was up +0.5% MoM vs an expectation of +0.3% MoM and an August reading of -0.5% MoM.  Jobs have held up as well, with August’s Employment Change to 33,500 vs -41,000 in August.  The number of full-time jobs added was 58,800 vs -25,300 part-time jobs!  The RBA is expected to raise rates by another 50bps at this week’s meeting, which would bring the cash rate to 2.85%.  However, in mid-September, RBA Governor Lowe said that at some point, the RBA will not need to hike 50bps, and that point is near.  This is leading some economists to believe that the RBA may only hike 25bps.  AUD/USD is sitting near its lowest levels since the pandemic, and if the central bank is anything but hawkish, the pair could move even lower.

The US is set to release Non-Farm Payroll data for September this week.  Expectations are for an increase of 250,000 jobs vs an August increase of 315,000 jobs.  The Unemployment Rate is expected to remain unchanged at 3.7%.  The jobs reports have been strong since the Fed began raising rates, and the Fed is hanging its hat on this data.  The strong jobs data has given the Fed confidence to hike rates by 75bps at a clip, which it is expected to do so again when it meets later this month.  However, to start the week off, the US released September’s ISM Manufacturing PMI at 50.9 vs 52.2 expected and 52.8 last.  The Employment component was only 48.7 vs 53 expected and 54.2 last.  This is a large fall from the previous month and may be a prelude to Friday’s NFP report.  Its also worth noting that the Prices component was 51.7 vs 52.8 last and the New Orders component was 47.1 vs 51.3 last.  Could this be an initial signal of a recession ahead?

AUD/USD had been trading aggressively lower since making a 2022 high on April 5^th at 0.7661.  On a daily timeframe, the pair has been trading lower in a descending wedge formation, at one point even forming a bearish Head and Shoulders pattern. The expectation for a descending wedge is that price will break out to the topside of the wedge.  However, in this case, once price broke below horizontal support from April 2020 near 0.6579, it broke below the wedge.  Since then, AUD/USD has been consolidating at the 61.8% Fibonacci retracement level from the lows of March 2020 to the highs of February 2021.  Given the consolidation just below the bottom trendline of the wedge, perhaps this is a false breakdown?

Source: Tradingview, Stone X

If the recent move in AUD/USD does prove to be a false breakdown, the first sign will be a move back into the descending wedge near 0.6600.  As if often the case, if price fails to breakout on one side of a pattern, it will often move to test the opposite side of the pattern.  On the shorter, 240-minute timeframe, price has formed a shorter-term descending wedge and has already broke above the top trendline.  The next resistance level above 0.6600 is horizontal resistance at 0.6671.  Above there, AUD/USD can move all the way to the top trendline of the longer-term descending wedge and horizontal resistance at 0.6914.  However, if the pair fails for move back into the wedge and the resistance holds, the first support is the top trendline of the shorter-term channel near 0.6430, then the lows of September 28^th at 0.6354.  Below there, price can move to the bottom trendline of the wedge near 0.6300.

Source: Tradingview, Stone X

With the RBA meeting on Tuesday and Non-Farm Payrolls from the US on Friday, AUD/USD could be volatile this week.  Will the RBA hike 25bps or 50bps?  Will the US jobs data be better (giving the Fed confidence to hike another 75bps) or worse (which may cause the Fed to slow the pace of tightening)?  Either way, there is a lot on the line for AUD/USD this week!

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