AUD/USD’s recovery is starting to look more convincing. The pair is edging closer to a test of the 0.6800 area in the near term, while a broader push towards the psychologically important 0.7000 level is quietly starting to form in the background.
The Australian Dollar (AUD) has picked up fresh momentum, lifting AUD/USD to the 0.6780 area for the first time since early October 2024 and keeping the bullish tone intact for a third consecutive session.
A big chunk of that upside, however, is being driven by strength elsewhere, most notably AUD/JPY. Indeed, the cross is hovering near 18-month highs as the Japanese Yen (JPY) remains under pressure, a move that gathered pace after an early sell-off in Japanese Government Bond (JGB) yields.
On the other side, the Greenback is holding on to modest gains as markets continue to digest President Trump’s comments at the World Economic Forum (WEF) in Davos. At the same time, tensions between the US and the European Union over Greenland remain unresolved, keeping a low-level risk premium in play.
Australia: slowing, but still on its feet
Recent Australian data haven’t exactly inspired enthusiasm, but they haven’t raised red flags either. Growth is clearly easing, yet the overall picture still fits neatly within a soft-landing narrative.
December Purchasing Managers’ Index (PMI) figures tell that story well. Both Manufacturing and Services cooled slightly but remained comfortably in expansion territory. Retail Sales are holding up reasonably well, and while the trade surplus narrowed to A$2.936 billion in November, it stayed firmly in positive territory.
Momentum is fading, but only gradually. Gross Domestic Product (GDP) expanded by 0.4% inter-quarter in the July-September period, down from 0.7% previously. On an annual basis, growth held steady at 2.1%, broadly in line with Reserve Bank of Australia (RBA) forecasts.
The labour market shows a similar pattern of gentle cooling. Employment fell by 21.3K in November, but the Unemployment Rate remained unchanged at 4.3%, pointing to moderation rather than outright weakness. Markets will be paying close attention to the upcoming December labour report due on Thursday.
Inflation remains the most uncomfortable part of the equation. Progress is being made, but it’s slow: Headline Consumer Price Index (CPI) inflation eased to 3.4% in November, while the trimmed mean slipped to 3.2%, still above the RBA’s target range. A small positive came from the Melbourne Institute survey, where consumer inflation expectations edged down to 4.6% from 4.7%.
China: still supportive, just less powerful
China continues to provide a degree of underlying support for the Australian Dollar, though it’s no longer the growth powerhouse it once was.
The economy expanded at an annualised pace of 4.5% in the October–December quarter, with quarterly growth at 1.2%. Retail Sales rose by an annualised 0.9% in December; solid numbers, but not the sort that used to supercharge AUD rallies.
More recent indicators point to tentative stabilisation. Both the official Manufacturing PMI and the Caixin index edged back into expansion at 50.1 in December. Services activity also improved, with the non-manufacturing PMI at 50.2 and the Caixin Services PMI holding at a healthy 52.0.
Trade was one of the clear bright spots. The surplus widened to $114.1 billion in December, with exports jumping nearly 7% and imports also rising by a solid 5.7%.
Inflation, however, continues to send mixed signals. Consumer Price Index (CPI) inflation was unchanged at 0.8% year-on-year in December, while Producer Price Index (PPI) inflation remained stuck in negative territory at -1.9%, a reminder that deflationary pressures haven’t fully faded.
For now, the People’s Bank of China (PBoC) is sticking with a cautious, wait-and-see approach. Loan Prime Rates (LPR) were left unchanged earlier this week, at 3.00% for the one-year and 3.50% for the five-year, reinforcing the view that any policy support will be gradual rather than forceful.
The RBA stays put
The Reserve Bank of Australia (RBA) struck a hawkish note at its latest meeting, leaving the cash rate unchanged at 3.60% and signalling no urgency to shift course.
Governor Michele Bullock pushed back firmly against expectations of near-term rate cuts, making it clear the Board is comfortable holding rates higher for longer and remains prepared to tighten policy further if inflation doesn’t play ball.
The December meeting Minutes added a layer of nuance, revealing ongoing debate around whether financial conditions are restrictive enough, an uncertainty that keeps rate cuts firmly in the “not guaranteed” camp.
Attention now turns to the fourth-quarter trimmed mean CPI release later this month, which could play a key role in shaping the next phase of the policy debate.
Even so, markets are currently pricing close to a 28% probability of a rate hike at the February meeting, alongside just over 37 basis points of tightening priced in over the year.
Positioning: bearish bets trimmed, confidence still thin
Positioning data suggest the worst of the bearish sentiment may be behind us, though conviction remains limited. Commodity Futures Trading Commission (CFTC) data for the week ending January 13 show speculative net short positions in the Australian Dollar trimmed slightly, hovering near 19K contracts, the least bearish reading since September 2024.
That said, open interest has started to lose momentum, easing to around 229.5K contracts. In other words, fresh money is still hesitant, pointing to caution rather than a decisive shift towards bullish positioning.
What to watch next
Near term: US data releases and ongoing tariff-related headlines are likely to continue driving the US Dollar side of the equation. At home, Thursday’s labour market report and preliminary Manufacturing and Services PMIs are the key domestic catalysts.
Risks: The Australian Dollar remains highly sensitive to global risk sentiment. Any sharp risk-off move, renewed concerns around China, or a stronger-than-expected rebound in the US Dollar could quickly cap further upside.
Technical landscape
From a broader perspective, the pair’s near-term positive outlook remains unchanged. Indeed, spot keeps trading above its 200-week and 200-day Simple Moving Averages (SMAs) at 0.6620 and 0.6535, respectively, keeping the medium-term trend going up.
Immediately to the upside, AUD/USD faces the next resistance level at the 0.6800 hurdle. The breakout above the latter exposes a move toward the 2024 ceiling at 0.6942 (September 30), prior to the 0.7000 milestone.
In contrast, the loss of the weekly troughs at 0.6659 (December 31) and 0.6592 (December 18) could put a potential move toward the 0.6610–0.6590 band, where the temporary 55-day and 100-day Simple Moving Averages (SMAs) are located, back into focus. Further south emerges the key 200-day SMA at 0.6534 seconded by the November floor at 0.6421 (November 21).
Looking at the broader picture, the near-term positive outlook should remain in place while above the 200-day SMA.
Meanwhile, momentum indicators favour extra upside, although not without caution: the Relative Strength Index (RSI) exceeds the 66 level and remains en route to enter the overbought territory, while the Average Directional Index (ADX), just past 30 is indicative of a robust trend.
Bottom line
AUD/USD remains closely tied to global risk sentiment and China’s economic trajectory. A clean break above 0.6800 would be needed to send a stronger bullish signal.
For now, a choppy US Dollar, steady, if unspectacular, domestic data, an RBA in no hurry to ease, and modest support from China keep the bias tilted towards gradual gains rather than a decisive breakout.
Employment FAQs
Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.
The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.
The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.
