- A look into the fundamental drivers behind the market’s thinking to be long of AUD/USD despite the carry advantage in the greenback.
- FOMC – what’s in in strore and what price action might be expected leading intot he event.
AUD/USD is consolidating below the 0.73 handle and trend line resistance within a “where-to-now?” zone, between the 0-23.6% fib of the 0.7085/7304 recent reversal of the 8th August downtrend from 0.7453. The pair has been unable to extend beyond the trend line resistance and has printed a daily doji/spinning top at the end of a series of highly bullish daily candles.
Fundamentally, it begs the question, “why higher”. The Australian economy seems to be moving along quite nicely, stronger than perceived at the start of the year when looking to the June quarter GDP report that was released recently – Real GDP increased by 0.9% in the June quarter and annual growth printed 3.4%. Domestic demand also grew by 3.4%. So, the question is, whether the RBA will
start to factor in higher projections for inflationary pressures sooner than the markets have been pricing in – probably not.
“Overall our revised growth forecasts for national growth do not change our forecasts for monetary policy,” Bill Evans, Chief Economist at Westpac explained – “We still expect the RBA cash rate to remain on hold through to the end of our forecast horizon – 2020. The key here is that following a 2.4% growth rate in 2017, the economy will only register a single above-potential growth performance before slowing back to slightly below potential in 2019 with a modest above potential lift in 2020. There is unlikely to be much-sustained progress in closing the output gap and delivering higher wage and price inflation outcomes.”
On good old fashioned interest rate driven price action, in the near term, the direction in AUD/USD subsequent of the AU/US spreads would usually be led more by Fed rhetoric than RBA projections nor Aussie domestic fundamentals – However, the FX market of late has been decoupling from rate spreads and much of the FOMC, that is due this week, is already priced into the dollar. As per usual, the event is all about the median forecasts and dots – Dollar bulls will be looking for a much more hawkish shift which would see the spread move further inverse and depending on how hawkish the outcome, it could potentially cap the bullish reversal below the 0.73 handle. The problem for the bears is that the market likes long Aussie as a value trade. It makes little sense considering the carry advantage has switched up and over to the US dollar, but as analysts at TD Securities, (TD) explained, within their tracking of growth, forecasts show a peak in US optimism – “For one, it could be a sign of the quality of US growth, implying the markets may start to care about the twin deficits theme again as much of the fiscal has gotten priced in.” The analysts at TD also note that the market is no longer upgrading its growth views on the US versus the rest of G10.
FOMC preview and lead-up to the event could be a reason to fade dollar rallies
Analysts at TD Securities noted that the recent round of Fed speeches have sounded hawkish (Brainard has been a critical talking point), and the US 10y poked above 3% for the first time in months. With this information in hand, that sets the context for the meeting.”
While the analysts argue that the deck is stacked in favor of a hawkish outcome, which entails keeping the word “accommodative” in the statement and sets the course for further rate hikes, they make an interesting point that, despite that, “FX markets can start to look for the next thing.”
The major risk for the dollar is anything from the meeting that may be considered as uber-dovish on the longer end. “The market will take any watering down (or even removing accommodative) as uber-dovish. The other focus is the dots that with the addition of two new members might get inched lower on the longer-term projections. We doubt either of these scenarios are priced in, leaving the potential for an asymmetric response to the USD. Our dovish lean argues for selling into any USD rallies ahead of the meeting,” the analysts argued.
Meanwhile, there is also a switch in how FX prices are reacting to the trade war and EM-FX risks and the FOMC will be interesting in that regard as well – for the progress from the US economy is not isolated from such possible ramifications and hence the market has been focussing more on the US twin deficits of late and how US consumers will take the brunt of higher prices. However, EM-FX has been showing signs of further weakness and risks have been mounting up. In fact, BIS came out and warned that the global economy could face a “relapse” of the crisis that rocked the world a decade ago and more importantly, there would not be enough “medicine” available to treat the problem this time.
All in all, there are strong arguments from both technical and fundamental perspective to be either short or long of the Aussie vs the dollar and for that reason, traders are on the sidelines until the FOMC and US GDP later this week waiting to hear of further geopolitical disruptions.
AUD/USD levels
Valeria Bednarik, chief analyst at FXStreet explained that the pair offers a neutral-to-positive stance according to the 4 hours chart:
“Technical indicators are currently resting above their midlines, trying to regain some upward slopes but without enough strength at the time being. In the same chart, the price is currently battling with a bullish 20 SMA while above the larger ones, also supporting a bullish continuation, more likely on an upward acceleration through the 0.7290 price zone. Given dollar’s ongoing weakness a decline seems unlikely unless risk-aversion takes over equities, something that could drag the Aussie lower.”
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