The following article was written by Ipek Ozkardeskaya, Senior Market Analyst at FCA regulated broker London Capital Group Holdings plc (LON:LCG).
Ipek Ozkardeskaya, LCG
The Reserve Bank of Australia (RBA) maintained its cash rate target at 1.50% as widely expected by analysts. The policy decision triggered little enthusiasm both in the hawkish and the dovish camp. Mixed policy statement couldn’t dissipate the taboo on the rising Australian dollar. The Aussie is now testing the top of the 0.7328 and 0.7538 range, which stands for the May low and the 50% retracement on the March – May decline.
According to policymakers, Australia’s labour market has improved, yet soft growth in salaries continue weighing on consumption.
The RBA expects the inflation to pick up gradually as the economy strengthens.
Yet, the debasement in commodity prices since March continue taking its toll on the recovery, although the mining investment transition is nearly completed and is supposed to limit the Aussie’s sensitivity to the global commodity prices.
As a result, the RBA has no alternative other than keeping its policy loose and readjusting its strategy in accordance with the global dynamics. This should mean that the idiosyncratic dynamics may lack strength to push the Aussie to a stronger positive trend against the US dollar.
In contrary, Aussie’s gains could meet a decent resistance given that the RBA still believes that the economic growth in Australia should soften, compared to the bank’s previous forecast.
1Q growth data surprised slightly higher
The Australian dollar rallied past the 200-day moving average on the back of a better than expected GDP data, which has temporarily wiped out concerns about a softer economic recovery in Australia. Growth in the first quarter fell to 1.7% year-on-year from 2.4%, slightly better than 1.6% expected by analysts. However, many would agree that the data was mostly in line with the RBA’s expectations. The market’s enthusiasm could therefore remain short-lived.
Of course, soft US yields also play a role in the AUDUSD’s current rise. A pick-up in the US yields could harm the Aussie’s recovery.
The key medium term resistance to the present puzzle is eyed at 0.7588, the 61.8% retracement. Below this level, the AUDUSD is expected to consolidate between the above-mentioned 0.7328 and 0.7538 area.
Which factors could clear the way to 80 cent?
Although the endogenous factors to the Australian dollar would not suffice to generate the positive momentum needed to pave the way toward the 0.8000 level, a positive breakout is still possible.
Waning hawkish expectations for the Federal Reserve’s (Fed) monetary policy should trim a part of the speculative short positions and rather encourage the carry traders to step in the AUDUSD market at dips.
Next week’s FOMC meeting is a key event. The general consensus is that the Fed will proceed with its third 25 basis points hike in the June meeting posterior to Donald Trump’s election as the President of the United States. Yet visibly, the Fed hawks are no longer enthusiastic about the second half of 2017. It is well possible that posterior to June, the Fed pauses its post-Trump rate hike marathon until December. If this is the case, carry traders would certainly not miss the opportunity to take advantage of a temporary softening in Fed expectations and trigger a temporary appreciation in the Aussie to 0.7750/0.7800 mid-term resistance.
However, if the US dollar benefits from a renewed positive vibe, breaking the 0.7328 support could bring a further sell-off to 0.7159 against the greenback, the January low, and extend toward the 0.7000 mark.