Australian Dollar Trend Signals Slowdown in Gains

Taking a look at the economic docket this past week, we have seen the Westpac leading index in April remain unchanged from March where figures rose 1.0 percent. Meanwhile, dwelling starts disappointed in the first quarter as the reading rose 4.3 percent, while economists were expecting a 7.0 percent rise. However, the spotlight was focused on the Reserve Bank’s Board Minutes for the month of June as speculators were interested in the influence that recent economic activity will have on policy going forward. Policy makers indicated that monetary policy will remain unchanged in the near future, and went onto add that borrowing costs are currently around “average levels.” As of late, investors are weighing in a zero percent chance that the RBA will hike rates twenty five basis points at its next rate decision meeting on July 6th, according to the Credit Suisse Overnight index swaps.

Looking ahead, there is little chance that policy makers will grow even more hawkish and explore rate increases at the pace that market participants recently witnessed amid European woes. However, traders should not rule out the chance of RBA raising rates at some point in the second half of the year as inflation pressures remain a focus for the central bank. Indeed, first quarter inflation jumped 0.9 percent, exceeding economists’ expectations for a 0.5 percent rise, while employment results are beginning to fuel wage pressures. As for this upcoming week, the economic docket is fairly light as new motor vehicle sales for May and the conference boarding leading index for April are the only scheduled events for AUD traders. Even though these events are not necessarily market moving, they are both noteworthy for direction going forward. Big ticket items in the new motor vehicle sales report will give us some insight regarding the ability of consumer spending, while the conference leading index usually precedes larger developments in the economy.

Also worth mentioning is the possibility that China may raise borrowing costs amid rising inflation. This adds concerns to the high yielding currency because China is its largest export market, and any attempts by the world’s second largest economy to cool the down its region will surely taper Australia’s recent gains in exports. With regards to price action going forward, the AUDUSD looks poised to test the 50-day SMA (0.8798) for resistance as our speculative sentiment index signals for further gains. However, investors should take caution entering a long position in this pair as the overall trend is to the downside. - MW