AUD/USD Squares Off As RBA & FOMC Kick Off May

Talking Points:

Monday provided a quiet start to a week that is not expected to remain quiet. Monday night in the US will provide RBA rate announcement. We could be seeing the start of support for AUD. Depending on the tone from Governor Lowe, we could see strength in AUD against haven currencies and other weaker commodity currencies like NZD. In grabbing insight from the options market, AUD 1-month risk reversals (out-of-the-money or OTM calls relative to OTMputs) traded to their highest level in six weeks showing traders are less worried about the downside than anytime in six weeks. We saw a similar development in the EUR before it moved to 1.09.

The USD will have to work to get out of its rut. The Citi Economic Surprise Index recently showed a negative reading for the US. Such a reading indicates persistent disappointments in the data relative to economist expectations. Wednesday’s FOMC and Friday’s NFP will look to push the Economic Surprise Index back above zero after a disappointing start to the week with US ISM Manufacturing (APR) missing expectations of 56.5 with a reading of 54.48.

Another note that should be kept on trader’s screens this week is to keep tabs on the JPY. May 3-5 will represent Golden Week in Japan, which will leave Japanese markets closed and likely driven by external factors such as risk sentiment. Despite US underperformance, multiple global indices are at all-time highs, and the sentiment picture from IG Client positioning is showing an inflection worth watching. IG Client positioning is showing trading fighting the spike in JPY crosses, which from a contrarian perspective could favor a continuation of JPY weakness. For USD/JPY, many traders are watching a daily close above 112 and ~123 on EUR/JPY. A breakout there could see a run higher in JPY crosses.