AUD/USD continues to defy broad US dollar strength

China faces capital flight

The source of the AUD/USD’s resilience, last week’s Reserve Bank of Australia (RBA) meeting minutes showed the RBA considered raising rates in September before deciding to allow more time to assess. Also, supporting the AUD/USD robust commodity prices and reports from China regarding facilitating foreign capital inflows.

China is currently dealing with its largest capital flight in years as foreign investors run for the exit towards economies with better growth prospects and less geopolitical risk. Whether the new rules around capital flows can prompt a more meaningful recovery in the CNY and, by extension, the AUD/USD remains to be seen.

Notably, Commodity Futures Trading Commission (CFTC) positioning data showed that the large speculative net short position in the AUD/USD increased last week to -96.9k contracts from -79.5k the prior week. This is the most significant short position as far as my data goes back to in late 2005.

This week, the key event on the local calendar for the AUD/USD is the release of the monthly consumer price index (CPI) indicator on Wednesday, previewed below and retail sales data on Thursday, both for August. If both were to come in stronger, it would increase the chances of an RBA rate hike in November, which currently sees just 10bp priced.

• AU Monthly CPI Indicator (Wednesday, 27 September at 11.30am AEST)

At its meeting in September, the RBA kept its cash on hold at 4.10% for a third consecutive month.

Although the RBA displayed more comfort around the inflation outlook, it retained its tightening bias, noting, "Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe" and that inflation "is still too high and will remain so for some time yet."

In the lead-up to the September board meeting lead-up, headline inflation eased to 4.9% year-on-year (YoY) in July, down from a peak of 8.4% YoY in December and below the market consensus for a 5.2% rise.

This was the lowest inflation rate since February 2022 but still well above the RBA's target range of 2-3%. Notably, the core monthly CPI indicator (excluding volatile items such as fuel, food, and holiday travel) showed a more modest decline in headline inflation at 5.8% in July compared to 6.1% in June.

This coming Wednesday sees the latest inflation update in the shape of the monthly CPI indicator for August. The market is looking for the headline monthly CPI indicator to rise to 5.2% YoY from 4.9% in June due to higher petrol prices.

Monthly CPI indicator chart

AUD/USD technical analysis

As we have consistently noted since 21 August and again last week here. Providing the AUD/USD remains above weekly uptrend support at .6360/50 (from the March 2020 .5509 low), allow for the AUD/USD to explore higher levels, initially towards .6520c with scope to .6600c and then the 200-day moving average at .6700c.

Aware that if/when the .6360/50 support level goes (closing basis), there isn't much in the way of downside support until .6200/.6170 (October 2022 low).

While we don’t dispute the various reasons why the AUD/USD has attracted selling interest, we note that historically, when positioning and sentiment become too one-way in the AUD/USD, it often sets the scene for a position wash for the ages. A recent example is the almost ten big figure rally, from the October 2022 .6170 low.

AUD/USD weekly chart

_{TradingView: the figures stated are as of 25 September 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}