Australian Dollar Outlook for 2023 Might Remain US Dollar Dependent Amid Uncertainty

Australian Dollar, AUD/USD, US Dollar, RBA, Fed, China, Momentum – Talking Points

• Australian Dollar fortunes appear to be tied to the US Dollar vortex to start 2023
• The RBA and the Fed remain in tightening mode but at different trajectories
• China faces re-opening challenges with Covid risks. Will it impact AUD/USD?

The Australian Dollar slipped on the first trading day of the year on Monday with most market participants yet to return from their New Year holiday.

Weaker than anticipated official Chinese PMI numbers published over the weekend may have contributed to the demise.

Tuesday is likely to see many more players back on deck and deeper liquidity might lead to more significant flows. Monday’s move for AUD/USD was largely in line with the US Dollar gaining ground across most markets.

The US Dollar has been underpinned by Treasury yields inching higher again after softening in early December. The benchmark 10-year note traded near 3.40% a month ago but is now back above 3.80%, still some way from the peak of 4.33% seen last October.

This may reflect the market’s re-assessment of the Federal Reserve’s agenda for the year ahead in terms of keeping rates higher for longer in an effort to get the inflation genie back in the bottle.

The RBA on the other hand has taken their foot off the tightening pedal despite inflation anticipated to go higher through 2023 according to their own forecasts. The path of this disparity might be crucial for AUD/USD this year.

Both the Federal Reserve and the RBA will be meeting in early February to decide on monetary policy.

Elsewhere, China could be another notable piece of the Aussie Dollar puzzle. The tilt away from their zero-case Covid-19 policy may have significant impacts on Australian exports.

Since the pivot from Beijing, iron ore prices have moved back above US$ 100 a tonne and many other industrial metals have also seen some buoyancy in the aftermath.

Australia’s trade balance remains at record highs and with AUD/USD languishing on interest rate differentials, the domestic economy continues to benefit.

AUD/USD TECHNICAL ANALYSIS

AUD/USD has been in the 0.6585 – 0.6893 range for two months as a descending trend line and an ascending trend line converge to create a Symmetrical Triangle formation.

A breakout of either side of this triangle might see momentum pick up in that direction.

Resistance could be at the prior peaks of 0.6893, 0.6916, 0.6956 and 0.7009.

On the downside, support may lie near the breakpoints and previous lows of 0.6669, 0.6629, 0.6585 and 0.6548

Chart created in TradingView

— Written by Daniel McCarthy, Strategist for DailyFX.com

Please contact Daniel via @DanMcCathyFX on Twitter