Talking Points:
- The Australian Dollar seems to have found a base
- However interest rate differentials still favor its US cousin
- These are likely to reassert themselves.
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The Australian Dollar remains very much within the long, gradual downtrend against the US Dollar which has characterized trade for all of 2018.
However, it does seem to have found a base around its recent low in the 0.7320 area, and to have settled into a near-term range between them and late-June’s highs around 0.7450. It’s reasonable to suspect that, when this range does break, it will be to the downside.
The same fundamental interest-rate-differential driver, which has driven AUD/USD lower, remains very much in place. The US Federal Reserve remains committed to raising its own rates for as long as the economic numbers make such a cause plausible. The Reserve Bank of Australia, meanwhile, has yet to raise the Official Cash Rate from its 1.50% record low and no rise is now priced-in to interest-rate futures markets for all of 2019. This is a strong negative, given that a rise was fully expected before the end of next year until fairly recently.
The RBA will give its July monetary policy decision this week and, in the course of leaving rates alone, it is all-but certain to sound a dovish note in any statement. The markets are used to this, of course, and so it may not be a catalyst for a break lower, but it seems likely that one will come, possibly in the form of any strong US data print.
The most recent lows coincide with 76.4% Fibonacci retracement of AUD/USD’s climb up from the lows of December, 2016, to the peaks of August, 2017.
A fall through those would make full retracement, all the way back down to 0.7172 a realistic medium-term prospect.
Risks
Weaker than expected US-data, suggesting that Fed hikes may be curtailed probably constitute the major risk to this trade. Australian improvements are only likely to roil it insofar as they suggest stronger inflation, and these seem unlikely to be conclusive over the trade timeframe, given the quarterly nature of official Australian inflation releases.
Stop loss buy orders above current levels, or toward the 0.7450 retracement level should mitigate some of these risks.
Resources for Traders
- Join a free Q&A Webinar and have your trading questions answered
- Find out how AUD is viewed by the trading community in real time at the DailyFX Sentiment Page
- Strategy not working? Here’s the number one mistake traders make
- Just getting started? Check out the DailyFX Beginners’ Guide.
--- Written by David Cottle, DailyFX Research
Follow David on Twitter @DavidCottleFX or use the Comments section below to get in touch!
