AUD/USD closed above its 200-day moving average for the first time since March 2018 earlier this week
If it is any other time during the year, I'd give the break more credibility and give buyers more credit for the move. However, this is a period where liquidity is pretty much as thin as it can get in markets and I'd be wary of a possible false break as such.
With that in mind, let's take a look at the reasons why the Australian dollar will be one of the more interesting major currencies to watch as we look towards the new year.
The technical picture
As mentioned above, AUD/USD managed to secure a daily close above its 200-day MA (blue line) for the first time since March 2018. The story of 2019 has been the pair continuously failing in a run against that level as well as key trendline resistance levels.
That precipitated a slow and steady grind lower for the aussie amid a flagging domestic economy, weaker economic conditions in China, and the RBA easing policy throughout.
From a technical perspective though, the break above is a rather significant one but again if it weren't for being the last week of the year, traders may build on that further.
The issue now is that real money flows aren't in the game at the moment so there is a possibility that the technical break above may be a bit of a false start.
But if liquidity conditions return next week and buyers can keep above the key level, there's good reason from a technical perspective for the aussie to maintain its run higher - especially on a move above the October highs and 13 December high @ 0.6930-39.
On such a run, the 0.7000 handle will be next before a test of the July high @ 0.7082.
The fundamental picture
This runs a little bit against the technical consideration above as the Australian economy is in a rather precarious spot going into the new year. Economic growth remains rather depressed - annual GDP growth is at levels last seen back in 2009.
Household consumption remains rather weak overall and that has been an ominous sign over the past few years now. One of the few bright spots for the Australian economy is that terms of trade is still seen as improving despite the backdrop of weaker domestic conditions.
Recent economic data also continues to allude to the more subdued situation:
With the latest bit-part bounce coming on the back of a better-than-expected November labour market report as seen here. Even then, there are still a couple of things one can be nit-picky about i.e. jobs growth were mostly part-time and the unemployment rate still remains a distance from the 4.5% coveted by the RBA.
Speaking of the RBA, they could possibly be the first major central bank to take action next year as we look towards their meeting on 4 February 2020:
After the more solid labour market report noted above, cash rate futures have reduced odds of a 25 bps rate cut by the RBA to ~38% currently from ~59% before the data last week.
But at this stage, it's still too much of an ask to dismiss such a possibility entirely - especially if we see more disappointing economic data over the next few weeks.
The issue for the RBA is that they have to try and bolster economic conditions while at the same time also try to ensure that they can drive inflation in the right direction.
On the latter point, the RBA's preferred measure of inflation i.e. trimmed mean CPI reading has not sat within their target band of 2% to 3% since 2016:
With there still being so much slack in the labour market and wage growth being rather benign, the bias is still towards the RBA cutting rates next year and that will raise questions about the possibility of QE as we approach the rates lower-bound.
RBA governor Philip Lowe has said that the central bank will only begin to consider QE if the cash rate reaches 0.25% (two 25 bps rate cuts away) and a cut in February will bring us one step closer to that discussion threshold.
Given such a heavy emphasis on the RBA and rates next year, I reckon it will be yet another one where AUD/USD will continue to be driven by yield differentials:
Other considerations
This is where I'll just highlight a couple of things to keep in mind when you weigh the balance of technicals and fundamentals. First off, let's look at positioning:
The market is still heavily short on the aussie but not to the extremes seen at the end of last year or the middle of this year. As such, there is room for shorts to be squeezed a little but at the same time, it also means that short positions can also rebuild given some buffer.
Let's then take a look at seasonal patterns:
I would argue that there isn't much to gather here with January being a rather asymmetric month in trading for AUD/USD. The pair posted three straight January declines from 2014-2016 before three January straight gains from 2017-2019.
February has more of a seasonal feel to it with the pair having risen during the particular month in 11 out of the last 15 years. That said, the last two years have seen the pair break the mold and with the RBA also in the picture to start next year, it is also no guarantee.
As such, I'd keep the seasonal consideration in the back pocket for now given that other factors may be at play to mess up the trading picture here.
It takes two to tango
That just about covers the aussie but also just be mindful that when we trade, we trade a currency pair - so there's always the other side of the equation to consider.
For the aussie against the dollar, I reckon the dollar side of the equation may be more choppy but also pay attention to the technical levels highlighted above. The risk mood will also be a consideration so just be wary of how trade developments are going.
For the aussie against the yen, it's pretty much similar as the pair also recently broke above its 200-day moving average. However, with all yen pairs, always keep an eye on yields and how risk sentiment is developing. That is one of the bigger factors to consider.
As such, keep an eye out for the US-China Phase One trade deal signing and if there are any hiccups or if things play out smoothly.
For the aussie against the kiwi, the pair is keeping below 1.05 but unable to break further below 1.04. The spot to watch in this one will be RBA pricing. If rates move against the aussie i.e. markets increase bets of RBA cutting in February, that could be the next catalyst for a push lower in the pair towards 1.03 and the August low just below that.
