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Record Trade Surplus to Curb AUD Weakness; RSI Divergence Persists

Record Trade Surplus to Curb AUD Weakness; RSI Divergence Persists

2017-03-01 16:20:00
David Song, Currency Strategist
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Talking Points:

- Record Australia Trade Surplus to Curb AUD/USD Weakness; RSI Divergence Persists.

- USD/JPY Snaps Back Following Failed Test of February Low (111.59); More Fed Rhetoric on Tap.

DailyFX Table

Currency

Last

High

Low

Daily Change (pip)

Daily Range (pip)

AUD/USD

0.7653

0.7700

0.7637

4

63

AUD/USD Daily

AUD/USD Daily Chart

Chart - Created Using Trading View

  • The Australian dollar pares the advance following the better-than-expected 4Q Gross Domestic Product (GDP) report, with AUD/USD at risk of extending the decline from earlier this week as it threatens near-term support around 0.7650 (38.2% retracement); failure to clear the 0.7730 (61.8% retracement) hurdle accompanied by the ongoing divergence in the Relative Strength Index (RSI) suggests the pair is on the cusp of a larger move especially as the pair breaks down from a near-term wedge/triangle formation.
  • Nevertheless, a further improvement in the Balance of Payments (BoP) may limit the downside risk for the Australian dollar as the region is expected to hit a record trade surplus in , and a positive development may keep the Reserve Bank of Australia (RBA) on the sidelines as the next interest rate decision on March 7 as the central bank anticipates ‘economic growth to be around 3 percent over the next couple of years.’
  • However, more of the same from Governor Philip Lowe and Co. may do little to boost the appeal of the Australian dollar as the RBA appears to be in no rush to lift the official cash rate off of the record-low, and the central bank may continue to tame expectations for a rate-hike with ‘the rise in underlying inflation expected to be a bit more gradual.’
  • As a result, a close below 0.7650 (38.2% retracement) may open up the downside targets ahead of the RBA meeting, with the next region of interest coming in around 0.7590 (100% expansion) to 0.7600 (23.6% retracement) followed by 0.7530 (38.2% expansion).

Currency

Last

High

Low

Daily Change (pip)

Daily Range (pip)

USD/JPY

113.80

114.05

112.76

103

129

USD/JPY Daily

USD/JPY Daily Chart

Chart - Created Using Trading View

  • USD/JPY looks poised for a larger recovery after failing to test the February low (111.59), and more fresh rhetoric coming of the Federal Reserve may fuel the near-term advance in the exchange rate as Fed Fund Futures now price a greater than 60% probability for a rate-hike in March; it seems as though recent comments from New York Fed President William Dudley and San Francisco Fed President John Williams have stoked interest-rate expectations as officials see a more ‘compelling’ case to raise the benchmark interest rate.
  • The diverging paths for monetary policy should continue to foster a long-term bullish outlook for dollar-yen especially as St. Louis Fed President James Bullard anticipates the committee to layout a more detailed exit strategy in 2017, and talks of unloading the balance sheet may heighten the appeal of the greenback as the Federal Open Market Committee (FOMC) stays on course to normalize monetary policy; in turn fresh remarks from Fed Governor Lael Brainard, Fed Governor Jerome Powell, Fed Vice-Chair Stanley Fischer and Chair Janet Yellen may fuel the near-term advance in USD/JPY as central bank officials increase their efforts to prepare U.S. household and businesses for higher borrowing-costs.
  • At the same time, the recent volatility in the dollar-yen exchange appears to be accompanied by a pickup in market sentiment, with global benchmark equity indices highlighting a similar behavior, but the Nikkei (JPN225) continues to lag behind its major counterparts as the DAX and S&P500 push to fresh 2017 highs.
  • As the Nikkei fails to clear the January high (19,698), USD/JPY may face range-bound conditions as it struggles to break above the Fibonacci overlap around 114.00 (23.6% retracement) to 114.30 (23.6% retracement), but the broader outlook remains constructive especially as the RSI preserves the bullish formation carried over from the previous year.

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--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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