AUD/USD testing key downtrend after convincingly reclaiming 0.7700 level

• AUD/USD looks set for a third successive day of gains, boosted by a weaker US dollar.
• The pair is currently testing a downtrend linking the January highs, a break above which would be a bullish signal.

AUD/USD looks set for a third successive day of gains as the currency pair makes the most of a further decline in the US dollar; AUD/USD has convincingly reconquered the 0.7700 level on Tuesday and now appears to be testing a downtrend linking the descending highs printed back in January. Gains have for the moment stalled at around 0.7730 and the pair currently trades higher by about 30 pips or 0.4% on the day, but a break above this downtrend could open the door for an acceleration of recent appreciation and perhaps a test of the 2021 highs just to the north of the 0.7800 level.

Correlated assets

Eyes will be firmly on price action in asset classes that carry a positive correlation to the Aussie, such as stock markets, iron ore and copper markets, as well as crude oil and gold. Stocks and crude oil have been taking a breather following a recent solid run of gains, but metals have seen strong gains, with Iron ore boosted as PBoC action eases Chinese liquidity concerns, copper boosted by the softer US dollar and stimulus hopes and precious metals boosted as US real yields drop. Should these trends continue, as well as stocks and crude oil markets start to rise again, the Aussie would be a prime G10 FX candidate for further gains.

Domestic Aussie Fundamentals

NAB released its latest business survey, collected in January, during Tuesday’s Asia Pacific session; the bank’s Business Confidence index rose to 10 from 4 in December, but the Business Conditions index dropped to 7 from 14 last month. NAB Group Chief Economist Alan Oster commented that “business started the year on a more optimistic note, even as conditions eased from the strength we saw in December… Importantly, employment conditions remain in positive territory – so overall businesses are still expanding their workforce.”

In a good signal for the Australian labour market, the NAB survey’s measure of capacity utilisation rose to 81.0% in January, which is around its pre-Covid-19 levels. Oster was bullish on the prospect for further gains in capacity utilisation; “we hope to see capacity utilisation rise further over coming months as demand picks up, which should, in turn, see businesses consider expanding capacity through hiring or investing” he said.

AUD seemed not to pay too much attention to the survey, with its focus much more on global risk and US dollar dynamics and movements in correlated asset classes.

AUD/USD four hour chart