Can RBA reverse the trend of the surging AUDUSD

Tomorrow, 01 August (Tuesday) at 0430 GMT, the Australian central bank (RBA) will annouce its latest monetary policy decision where median consensus for the policy cash rate is expected to remain unchanged at 1.5% in place since August 2016.  As at 27 July 2017, data from the interest rate futures market (ASX 30 Day Interbank Cash Rate Futures) had also priced in a 0% expectation of a rate hike in the policy cash rate.

In the last two weeks, the AUD/USD had surged and briefly poked above the 0.8000 psychological level (printed a high of 0.8065 on 27 July 2017 before it retreated) not seen since May 2015. The recent strength of the Aussie has been attributed by these factors as follow:

• In the minutes of the last monetary policy meeting held in July 2017, RBA officials had stated that monetary policy had been clearly expansionary in the preceding five years and current low interest rates should start to reverse to the upside as it upgraded its estimated new nominal neutral cash rate to 3.5% (200 bps higher that the current policy cash rate of 1.5%). This hawkish rhetoric had led the swap markets to price an increase in the odds of an interest rate hike in June 2018 to around 45% from 20% seen a month ago.
• Australia’s biggest export, iron ore had started to stabilise after a horrendous plunge seen at the start of 2017. The price of iron ore had rebounded by close to 20% from US$53 per tonne from a month ago to US$70.50 per tonne as at Friday, 28 July 2017.
• General USD weakness seen across the major currency pairs due to lacklustre inflationary pressure in the United States and the risk of a delay in the implementation of Trumponomics that is needed to drive up inflationary growth expectations due to the recent political hiccups seen in the U.S. administration and Congress. The Aussie (AUD) is the second best performing currency after the EUR as it soared by 9.7% against the USD since the start of 2017 till last Friday, 28 July 2017 (see chart 1).

Chart 1 -  Performance of major currencies against USD since Jan 2017

The key focus for tomorrow will be on the tonality of the monetary policy statement. One main focus will be on whether the RBA will attempt to “talk down” on the recent strength of the AUD as it did in the past when its resurgence “complicates matters” via lower tradeables costs that can delay RBA’s goal to bring back underlying inflation to the midpoint of its 2%-3% target.

In our view, the RBA is likely to keep its policy cash rate unchanged at 1.5% and offer a balance tone in its accompanying monetary policy statement where it is expected to acknowledge the on-going robust growth in the job market.

The last employment data for June had shown an increase of 14,000 in seasonally adjusted terms coupled with a surge in full-time employment of 62,000 to 8.356 million. This current nine months of consecutive employment gains is the longest streak since January 2011. The recent strength seen in the job market should indicate that the persistence softness seen in wage growth is coming to an end.  Also, RBA officials had mentioned in the minutes of its previous July meeting that “the recent strength seen in the labour market had removed some of the downside risk in the Bank’s forecast of wage growth.

If RBA highlights such upbeat view on its outlook for wage growth in tomorrow’s policy statement a contrast with a line that was used in the previous statement that stated “wage growth remains low and this is likely to continue for a while yet”, thus any downside risk to the AUD/USD trigger by a RBA “talk down” should be counterbalanced by such potential positive tone on wage growth.

Now, let us take a look at the AUD/USD from a technical analysis perspective.

Short-term technical outlook on AUD/USD

Key technical elements

• The AUD/USD has managed to have a weekly close above its recent bullish breakout of the former long-term pull-back resistance from April 2001 low now turns pull-back support at 0.7920 (see weekly chart).
• The aforementioned pull-back support of 0.7920 also confluences closely with the lower boundary of a short-term ascending channel in place since the 07 July 2017 minor swing low, the pull-back support of a former minor range configuration bullish breakout seen on 27 July 2017 (depicted in dotted green line as seen in the hourly chart) at 0.9740 (see hourly chart).
• Short-term upside momentum remains intact as the hourly RSI oscillator remains positive above its corresponding ascending trendline support at the 43% level and still has room to manoeuvre to the upside before it reaches at extreme overbought level.
• The next short-term significant resistances stands at 0.8095 and 0.8135/8160 (Fibonacci projection cluster & the upper boundary of the short-term ascending channel) (see  hourly chart).

Key levels (1 to 3 days)

Pivot (key support): 0.7940/7920

Resistances: 0.8065, 0.8095 & 0.8135/8160

Next supports: 0.7875 & 0.7830

Conclusion

The short-term bullish uptrend from the 07 July 2017 low of 0.7569 remains intact. As long as the 0.7940/7920 short-term pivotal support holds, the AUD/USD may shape another potential bullish  impulsive upleg to retest the 0.8065 minor swing high of 27 July 2017 before targeting the next resistances at 0.8090 and 0.8135/8160 next.

On the other hand, failure to hold above 0.7920 is likely to put the bulls on hold to open up scope for a deeper corrective decline towards the next supports at 0.7875 and even 7830 next (minor swing lows of 21 July/26 July 2017 & the 38.2%/50% Fibonacci retracement of the rally from 07 July 2017 low to 27 July 2017 high).

Charts are from eSignal

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