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FX Talking Points:

- AUD/USD Breaks Out of Narrow Range Even as Reserve Bank of Australia (RBA) Endorses Wait-and-See Approach. Dismal Australia GDP Report to Rattle Aussie-Dollar Rebound.

- USD/JPY Monthly Opening Range Hints at Larger Recovery as Bear-Flag Stalls, Relative Strength Index (RSI) Holds Above Oversold Territory.

DailyFX TableAUD/USD Table

AUD/USD breaks out of the narrow range from earlier this month even as the Reserve Bank of Australia (RBA) endorses a wait-and-see approach for monetary policy, but fresh updates to Australia’s Gross Domestic Product (GDP) report may rattle the near-term rebound in the aussie-dollar exchange rate as the growth rate is expected to slow to an annualized 2.5% from 2.8% in the third-quarter of 2017.

A material slowdown in the growth rate may curb the recent advance in AUD/USD as it encourages the RBA to keep the cash rate at the record-low, and the central bank may continue to tame bets for an imminent rate-hike as ‘inflation remains low, with both CPI and underlying inflation running a little below 2 per cent.’ The comments from Governor Philip Lowe and Co. suggest the central bank is in no rush to implement higher borrowing-costs as ‘household incomes are growing slowly and debt levels are high,’ and it seems as though the RBA will continue to jawbone the local currency in 2018 as ‘an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.’

As a result, the RBA’s wait-and-see approach may keep the broader outlook contained within a wide range especially as the 0.8150 (100% expansion) region continues to offer resistance, but recent price action raises the risk for a larger rebound in the aussie-dollar exchange rate as the bearish momentum carried over from the previous month appears to be abating.

AUD/USD Daily Chart

AUD/USD Daily Chart
  • AUD/USD may stage a larger recovery as it snaps the bearish sequence from the previous week after failing to break/close below the 0.7720 (23.6% retracement) to 0.7770 (61.8% expansion), with the Relative Strength Index (RSI) snapping the bearish formation carried over from last month as it turns around ahead of oversold territory.
  • Topside targets will come back on the radar on a break/close above the 0.7850 (38.2% retracement) to 0.7860 (61.8% expansion) area, with the next hurdle coming in around 0.7930 (50% retracement) to 0.7940 (61.8% retracement) followed by the 0.8030 (38.2% expansion) region.
USD/JPY Table

The recent decline in USD/JPY appears to be stalling as the pair initiates as fresh series of higher highs and lows during the first full-week of March, and the bear-flag formation may unravel over the coming days as the Relative Strength Index (RSI) starts to deviate with price.

Keep in mind, the broader shift in USD/JPY behavior may continue to unfold in 2018 as the Bank of Japan (BoJ) starts to alter the outlook for monetary policy, and Governor Haruhiko Kuroda and Co. may unveil a tentative exit strategy later this year as the central bank looks to conclude its Quantitative/Qualitative Easing (QQE) Program with Yield-Curve Control in fiscal 2019.

Nevertheless, fresh remarks from Dallas Fed President Robert Kaplan suggest the Federal Open Market Committee (FOMC) is on course to deliver at least three rate-hikes in 2018 despite the uncertainty surrounding the fiscal outlook, and the central bank may continue to prepare U.S. households and businesses for higher borrowing-costs as the official favors normalizing monetary policy ‘sooner rather than later.’ The FOMC is likely to strike a hawkish tone at the next interest rate decision on March 21 as the U.S. economy is ‘either at or beyond full employment now,’ but ongoing projections for a neutral Fed Fund rate of 2.75% to 3.00% may do little to heighten the appeal of the greenback as it undermines speculation for a more aggressive hiking-cycle.

With that said, the near-term outlook for USD/JPY is getting clouded with mixed signs as the pair snaps the bearish formation from the previous week, while the Relative Strength Index (RSI) fails to push back into oversold territory, and key developments coming out of the U.S. economy may largely shape the near-term outlook for the dollar-yen exchange rate as market attention turns to the U.S. Non-Farm Payrolls (NFP) report.

USD/JPY Daily Chart

USD/JPY Daily Chart

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  • The failed attempts to break/close below the 105.40 (50% retracement) raises the risk for a larger rebound in USD/JPY especially as the RSI holds above 30, with the pair at risk of extending the recent series of higher highs and lows if both price and the momentum indicator threaten the bearish formations carried over from earlier this year.
  • A break/close back above the 106.70 (38.2% retracement) to 107.20 (61.8% retracement) region raises the risk for a move back towards 108.30 (61.8% retracement) to 108.40 (100% expansion), with the next area of interest coming in around 109.40 (50% retracement) to 110.00 (78.6% expansion).

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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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