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Australian Dollar: AUD/USD Driven by Dovish RBA, US-China Tension

Australian Dollar: AUD/USD Driven by Dovish RBA, US-China Tension

David Song, Strategist

Australian Dollar Talking Points

AUD/USD struggles to retain the rebound from earlier this week amid concerns surrounding the US-China trade negotiations, and the monthly opening range keeps the downside targets on the radar as the exchange rate pullbacks ahead of the October-high (0.6930).

Australian Dollar: AUD/USD Driven by Dovish RBA, US-China Tension

AUD/USD showed a muted reaction to the Federal Open Market Committee (FOMC) Minutes even though the central bank insists that “the current stance of monetary policy was likely to remain appropriate as long as the economy performed broadly in line with the Committee's expectations,” and developments surrounding “phase one” of the US-China trade agreement may have a greater influence on the exchange rate amid little signs of an imminent deal.

China Foreign Ministry Spokesperson,Geng Shuang, reiterates that “China and the US remain in close communication” at the latest press conference, but went onto say that “China will have to take strong countermeasures to defend our national sovereignty” as Congress passes the Hong Kong Human Rights and Democracy Act of 2019.

Increased tension between the US and China, Australia’s largest trading partner, is likely to be a growing concern for the Reserve Bank of Australia (RBA), and the central bank may take additional steps to insulate the economy as the board remains “prepared to ease monetary policy further if needed.”

The RBA Minutes revealed that “members reviewed the case for a further reduction at the present meeting” amid the weakening outlook for global growth, and the comments suggest Governor Philip Lowe and Co. will stick to the rate easing cycle as “members observed that a further gradual lift in wages growth would be needed for inflation to be sustainably within the 2–3 per cent target range.

Image of RBA interest rate decisions

It remains to be seen if the RBA will keep the official cash rate (OCR) on hold at its next meeting on December 3 as officials gauge “the effects of the earlier monetary easing,” but the central bank may continue to implement lower interest rates in 2020 amid the protracted trade negotiations between the US and China.

As a result, the Australian Dollar may face a more bearish fate over the coming days, and the monthly opening range suggests the correction from the yearly low (0.6671) has run its course as the exchange rate reverses course ahead of the October-high (0.6930).

Sign up and join DailyFX Currency Strategist David Song LIVE for an opportunity to discuss potential trade setups.

AUD/USD Rate Daily Chart

Image of AUD/USD rate daily chart

Source: Trading View

  • Keep in mind, the AUD/USD rebound following the currency market flash-crash has been capped by the 200-Day SMA (0.6933), with the exchange rate marking another failed attempt to break/close above the moving average in July.
  • A similar scenario appears to be taking shape in November as the correction from the yearly low (0.6671) fails to spur a test of the simple moving average, which largely lines up with the Fibonacci overlap around 0.6950 (61.8% expansion) to 0.6970 (23.6% expansion).
  • In turn, the monthly opening range raises the scope for a further decline in AUD/USD as the exchange rate pullback from the October-high (0.6930) and snaps the upward trend from the previous month.
  • Will keep a close eye on the Relative Strength Index (RSI) as it continues to track the upward trend carried over from August, but the oscillator may offer a bearish signal should the indicator snap trendline support.
  • As a result, lack of momentum to hold above the 0.6800 (61.8% expansion) handle may spur a more meaningful run at the Fibonacci overlap around 0.6720 (78.6% expansion) to 0.6730 (50% expansion), with the next downside hurdle coming in around 0.6680 (61.8% expansion), which lines up with the yearly low (0.6671).

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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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