Australian Dollar Talking Points
The opening range for 2020 raises the scope for a further decline in AUD/USD as the exchange rate extends the series of lower highs and lows from the start of the month.
AUD/USD Analysis: 2020 Opening Range Filled with Lower Highs and Lows
AUD/USD slips to a fresh weekly low (0.6850) even though Australia Building Approvals jump 11.8% in November, and the exchange rate may continue to give back the advance from the 2019 low (0.6671) as the near-term correction fails to produce a test of the July high (0.7082).
There appeared to be a shift in AUD/USD behavior as it closed above the 200-Day SMA (0.6896) for the first time since 2018, but lack of momentum to hold above the moving average may fuel a further decline in the exchange rate despite the narrowing threat of a US-China trade war.
It seems as though the US and China, Australia’s largest trading partner, are on track to sign the Phase One trade deal on January 15 as President Donald Trump pledges to visit Beijing at a later date “where talks will begin on Phase Two,” and the agreement may spark a bullish reaction in the Australian Dollar as it instills an improved outlook for global growth.
In turn, the Reserve Bank of Australia (RBA) may merely attempt to buy time at its first meeting for 2020, and the central bank may strike an upbeat tone on February 4 as “the Australian economy appears to have reached a gentle turning point.”
It remains to be seen if the RBA will alter the forward guidance over the coming months as officials “assess the evidence of how the easing in monetary policy was affecting the economy,” but Governor Philip Lowe and Co. may continue to emphasize that the board has “the ability to provide further stimulus” as the Trump administration remains reluctant to rollback tariffs.
As a result, the RBA may keep the door open to further insulate the economy, and the central bank may continue to push monetary policy into uncharted territory as the International Monetary Fund (IMF) warns that “unconventional monetary policy measures such as quantitative easing may become necessary.”
With that said, the dovish forward guidance may continue to produce headwinds for the Australian Dollar, and AUD/USD may face a more bearish fate over the coming months as the Federal Reserve moves way from its rate easing cycle.
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AUD/USD Rate Daily Chart
Source: Trading View
- AUD/USD has been capped by the 200-Day SMA (0.6900) for most of 2019, but the recent break/close above the moving average signals a potential shift in market behavior especially as the Relative Strength Index (RSI) pushes into overbought territory for the first time since 2018.
- However, the bullish momentum appears to be abating as the RSI falls back from overbought territory and flashes a textbook sell signal, with the oscillator snapping the upward trend from December.
- At the same time, AUD/USD has snapped the series of higher highs and lows from late December after failing to close above the 0.7020 (50% expansion) region, with the lack of momentum to test the July high (0.7082) raising the risk for a further decline in the exchange rate.
- The opening range for 2020 brings the downside targets on the radar for AUD/USD as the exchange rate extends the series of lower highs and lows from the start of the month, but need a close below the 0.6850 (78.6% expansion) region to open up the 0.6800 (61.8% expansion) handle.
- Next area of interest comes in around 0.6720 (78.6% expansion) to 0.6730 (100% expansion) followed by the Fibonacci overlap around 0.6620 (100% expansion) to 0.6650 (61.8% expansion).
--- Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong.
