AUD/USD supported by 21DMA, consolidates around 0.7800

• AUD/USD has dropped back from earlier session highs to consolidate around the 0.7800 mark.
• A deterioration in risk appetite was the main driver of the drop.
• Aussie trade and retail sales data is set for release overnight and will be eyed by AUD traders.

AUD/USD has been under pressure on Wednesday amid a broad deterioration in the market’s broad appetite for risk. The pair was trading in a 0.7820-40 range during the Asia Pacific/early European sessions but has since dropped back to trade on either side of the 0.7800 level. At present, the pair traders 0.3% or about 25 pips lower on the day.

Note that AUD/USD did find decent support at its 21-day moving average (DMA), which currently sits just to the north of the 0.7770 level, which coincided with the support offered from a, uptrend linking the late-February and 2 March lows at 0.7692 and 0.7736 respectively. Technically speaking, AUD/USD now appears to be forming an ascending triangle, with the weekly highs in the upper 0.7830s forming the ceiling.

If the bears regain control between now and the end of the week and AUD/USD breaks below its 21DMA and recent uptrend, a test of the 50DMA at 0.7724 as well as last week’s low just beneath the 0.7700 level could be on the cards. Alternatively, a break to the upside of this week’s highs could open the door to a run at the 0.7900 level, with not much by way of key areas of resistance in the interim.

Driving the day

Focus returned to bond market price action on Wednesday, with US government bond yields rising sharply higher (at the time of writing, US 10-year yields are up just over 5bps on the day and nearly crossed above 1.50% at one point). This seems to have triggered some nerves as investors fear a repeat of the volatility seen at the end of last week. US equity markets are lower as a result and risk-sensitive FX (including AUD and NZD) are amongst the G10 FX underperformers on Wednesday.

Poor US data hasn’t helped the situation; the recently released February ISM Services PMI survey was underwhelming, with the headline index dropping to 55/3 versus expectations it would remain steady at 58.7. The subindices also showed weakness, with Business Activity dropping to 55.5 from 59.9 in January, Employment dropping to 52.7 from 55.2 in January and New Orders dropped nearly 10 points to 51.9 from 61.8. Capital Economics think the weakness represents severe winter weather conditions seen across the country last month. Meanwhile, Prices Paid shot higher to 71.8 from 64.2 amid supply shortages, a jump which Capital Economics thinks may foreshadow an increase in Core PCE to about 2.4% within the next few months.

Sticking with the theme of US data, Wednesday also saw the release of ADP’s estimate of the number of jobs added to the US economy in February; their estimate suggests the economy gained 117K jobs, lower than expectations for their estimate to show a job gain of 177K jobs. Capital Economics note that this data was a disappointment given that “the drop-off in coronavirus case numbers and the resulting lifting of containment measures should be giving the economy a bigger shot in the arm”. The economic consultancy continues that “the disappointing ADP figure presents a clear downside risk to our otherwise above-consensus estimate that non-farm payrolls increased by 500,000 last month”, but they caveat that “given the ADP's patchy correlation with the official employment data and the strength of the high-frequency data, we are happy to stick with that estimate”.

Looking ahead, focus will return to domestic Aussie affairs during Thursday’s Asia Pacific session with the release of the January Trade report at 00:30GMT. The Trade Balance on the month is expected to come in at an AUD 6.5B surplus. Westpac notes that the Australian economy has managed a trade surplus for 36 consecutive months now or every month since the start of 2018. The first month of 2021 is, thus, expected to continue this trend. ANZ thinks there is a risk that the service surplus could decline somewhat as some international students finished their degrees and likely went back home. At the same time as trade data, the final estimate of Australian January Retail Sales will also be released; markets expect the data to remain unrevised from the preliminary ABS estimate of +0.6% MoM.