Will FX hedging strategies provide support for the weakening Australian dollar?

AUD/USD snaps four-week winning streak

AUD/USD finished lower last week at 0.6411 (-0.33%), snapping a four-week winning streak that had seen it gain more than 10% from its April low.

The decline came as the [currency|United States dollar (USD)] made broad gains, supported by positive news flow around trade negotiations and after the Federal Reserve (Fed) reiterated it is in no hurry to cut interest rates.

Whether the AUD/USD can regain its footing this week will largely depend on:

• Offshore developments related to tariffs and trade agreements 
• Consumer and business sentiment survey on Tuesday, 13 May
• Wages data on Wednesday, 14 May 
• Jobs report for April on Thursday, 15 May, which is previewed below.

JP Morgan research highlights superannuation fund FX hedging opportunity

In the interim, a piece of recent foreign exchange (FX) research from JP Morgan relevant to AUD/USD has caught our eye. JP Morgan remains concerned about a potential US recession, which poses a risk for global investors heavily invested in US equities, including Australian superannuation funds.

These Australian superannuation funds, predominantly focused on equities, have been driven towards international equities, particularly US equities, due to limited domestic equity issuance and the substantial growth of the Australian superannuation pool, estimated at around A$3.7 trillion.

JP Morgan has estimated that the FX hedge ratios of Australian superannuation funds on US equity investments are currently at a historical low of 22%. This is because a decline in US equity markets typically coincides with a drop in AUD/USD, which helps cushion losses on the equity portion of portfolios invested in US stocks.

However, with the positive correlation between US equities and the AUD/USD breaking down last month, superannuation funds are likely to be considering raising their FX hedge levels, and if they do, this should prove to be supportive of the AUD/USD spot rate.

Employment

Date:Thursday, 15 May at 11:30am AEST

For March, the Australian economy added 32,200 jobs, below the 40,000 gain the market had expected. The unemployment rate edged higher to 4.1% from a downwardly revised 4% in February, as the participation rate edged up to a four-month high of 66.8%.

The Reserve Bank of Australia (RBA) noted at its Board meeting in April, where it kept rates on hold, that labour market conditions 'remain tight.' It also noted that it would continue to 'pay close attention to developments in the global economy and financial markets, trends in domestic demand, and the outlook for inflation and the labour market' to guide its future decisions about monetary policy.

For April, the Australian economy is expected to add 25,000 jobs, and the unemployment rate is expected to remain at 4.1%. Assuming job numbers are in line with expectations or softer, and with inflation back within the RBA's target band, the RBA is likely to cut interest rates by 25 basis points (bp) to 3.85% at its next meeting.

AU unemployment rate chart

AUD/USD technical analysis

After completing a triangle-style 'ABCDE' five-wave correction in early April, AUD/USD dived to its 9 April 0.5912 low, leaving a potential V-shaped bottom often seen at medium-term highs and lows.

Previous analysis at the end of April indicated that a sustained break above the 200-day moving average (MA) at 0.6467 would increase the likelihood of AUD/USD completing a V-shaped medium-term bottom at the 0.5914 low, with a subsequent rally towards the 200-week MA at 0.6770 anticipated.

Until AUD/USD achieves a sustained break above 0.6467, there remains the possibility for the currency pair to ease back to 0.6200.

Last Wednesday's rejection of the key 0.6500 level, followed by a swift retreat below the 200-day MA strongly suggests that AUD/USD may have exhausted its upward momentum in the short term. However, from a medium-term perspective, the currency pair is considered to be based at the April 0.5912 low.

Once overbought readings are resolved and momentum is rebuilt, a break above the 200-day MA now at 0.6459, and exceeding last week's 0.6514 high, is expected before potentially advancing toward the 200-week MA at 0.6770. 

AUD/USD daily chart

• _{Source: TradingView. The figures stated are as of 12 May 2025. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}