Australian Dollar Talking Points
AUD/USD appears to be stuck in a narrow range following the upbeat US Non-Farm Payrolls (NFP) report, and developments coming out of the world’s largest economy may continue to drag on the exchange rate as the Trump administration struggles to reach a trade deal with China, Australia’s largest trading partner.
AUD/USD Traders Eye FOMC Meeting, US-China Trade News
AUD/USD struggles to extend the rebound from the November low (0.6754)ahead of the Federal Reserve’s last meeting for 2019 as the Trump administration appears to be on track to raise China tariffs on December 15.
The ongoing shift in US trade policy may become a growing concern for the Federal Open Market Committee (FOMC) as the Office of the United States Trade Representative (USTR) looks to Europe and initiates“a process to assess increasing the tariff rates and subjecting additional EU products to the tariffs.”
Nevertheless, the 266K expansion in US payrolls may encourage the FOMC to take a break from its rate easing cycle as the labor market shows signs of stick job and wage growth. In turn, the committee may tame speculation for lower interest rates as Chairman Jerome Powell and Co. see “the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook of moderate economic growth.”
However, it remains to be seen if Fed officials will alter the forward guidance when they update the Summary of Economic Projections (SEP). A downward revision in the interest rate dot-plot may produce a bearish reaction in the US Dollar as the central bank prepares households and businesses for a more accommodative stance.
In turn, the FOMC may reiterate that the “risks to the outlook associated with global economic growth and international trade were still seen as significant,” and the central bank may show a greater willingness to implement lower interest rates in 2020 as the US and China struggle to reach a trade deal.
In response, the Reserve Bank of Australia (RBA) may continue to strike a dovish tone at its next meeting on February 4, and the central bank may look to further insulate the economy over the coming months as “the Board is prepared to ease monetary policy further if needed.”
With that said, waning hopes for US-China trade deal may produce headwinds for the Australian Dollar, and the recent rebound in AUD/USD may prove to be short lived as the exchange rate struggles to extend the rebound from the November low (0.6754).
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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 (0.6913), with the exchange rate marking another failed attempt to break/close above the moving average in July.
- A similar scenario appears to have taken shape in November as the correction from the yearly low (0.6671) failed to trigger 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).
- The Relative Strength Index (RSI) highlights a similar dynamic as the oscillator snaps the upward trend from August.
- In turn, recent rebound in AUD/USD may prove to be short lived as the exchange rate struggles to extend the string of higher highs and lows from the November low (0.6754)
- Lack of momentum to hold above the 0.6830 (23.6% expansion) to 0.6850 (78.6% expansion) region may push AUD/USD back towards the Fibonacci overlap around 0.6720 (78.6% expansion) to 0.6730 (50% expansion), with the next area of interest 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.
