- AUD/USD is knocking on the door of the 0.70 handle.
- AUD/USD now depends on Australian data and trade wars/global growth.
- Keen eyes on global interest rates to the determine trajectory of AUD/USD.
Both the RBA and Federal Reserve are in focus following a build up to the RBA over the past few weeks and an escalation in sentiment of a rate cut from the Federal Reserve following Fed’s Bullard’s, a voting OMC member, uber-dovish rhetoric earlier this week which has just been underpinned in part by Powell and Clardia today.
Coming back to the Fed and dollar shortly, the RBA has flown by with very little physical impact on the Aussie, although it has definitely squared those lingering questions as to what the RBA’s stance is on a number of key inputs for the Aussie markets. Firstly, as widely expected and previously telegraphed by the RBA, they did indeed cut interest rates yesterday by 25bp following its June Board meeting and this followed:
Today’s decision to lower the cash rate will help make further inroads into the spare capacity in the economy. It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target.
Then, looking through the statement, which is what prudent traders would have done to look for trading opportunities following the announcement, apart from the final paragraph, (the go-to paragraph for traders that usually offers a precise guidance as to the course of their next move), the two key paragraphs that stood out the most were as follows:
- “The outlook for the global economy remains reasonable, although the downside risks stemming from the trade disputes have increased.”
- “Labour market outcomes suggest that the Australian economy can sustain a lower rate of unemployment.“
So, while the RBA doesn’t sound anymore bearish on the economy when taking into consideration global risks, the RBA Governor said that it is “not unreasonable to expect a lower cash rate”. However, the RBA’s threshold as far as unemployment goes and inflation should be examined more closely as well. There was a desire to move unemployment to 4.5% or lower and there is definitely a disappointment on the boras over the lack of progress toward their inflation objective.
Analysts at ANZ, picking up on this, have argued that, “if the range of employment data doesn’t show some very clear improvement, the next cut will be delivered as soon as August (we think July is very unlikely because the employment data for May will be distorted by the election and hard to interpret). Certainly, our current expectation of a November rate cut is looking like being too far out.”
Todays GDP will be key because it will be the first data that could contribute to a patch of data that stats to show a significant improvement which will enable an otherwise very reluctant bank to hold off from cutting rates, because there really isn’t so much ammunition on the downside below 1%.
Markets pricing in a Fed cut to the dollar
Much can be the same for the Federal Reserve. Following yesterday’s uber-dovish rhetoric from the Fed’s James Bullard, Powell spoke earlier today and sad that the Federal Reserve will respond “as appropriate” to the risks posed by a global trade war and other recent developments, in remarks that seemed to open the door to the possibility of a rate cut. This is playing into the bands of the dollar bears. However, there has been some balancing in U.S. yields today in a slightly more risk-friendly market which was helping to prop up the greenback on the 97 handle and cap AUD/USD just below the 0.70 handle – (Albeit under fire again at the time of writing with a fresh high scored at 0.0703). At the same time, and should we least forget, the Fed is not alone in having switched its policy bias in recent months. The ECB, the Riksbank and the BoC have dropped their hawkish biases while the RBA has now joined its antipodean counterpart, the RBNZ, in cutting rates.
AUD/USD levels
AUD/USD looks set for further gains to its 55-dma at .7035, according to analysts at Commerzbank:
“It remains upside corrective near term. We suspect that it has recently based just ahead of the 78.6% Fibonacci retracement at 0.6857. Initial resistance is the March low at .7004 as well as the 55 day moving average at 0.7035. Further up resistance can be spotted at the 0.7207 February high. Elliott wave counts are implying that the market will struggle at the 0.7069 30th April peak. A rise above the 0.7207 late February high would target the December 2018 high at 0.7394. Where are we wrong? A fall and daily chart close below the 0.6857 78.6% Fibonacci retracement would target the 0.6738 December 2019 low.”
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