Australian Dollar Talking Points
AUD/USD trades to a fresh monthly high (0.6445) ahead of Australia’s Employment report, but fresh developments coming out of the economy may rattle the recent correction in the Australian Dollar as Treasurer Josh Frydenberg “expects the unemployment rate to rise to 10 per cent in the June quarter from 5.1 per cent.”
AUD/USD Rate Correction to Face Australia Employment Report
AUD/USD continues to retrace the sharp decline from the previous month as the Reserve Bank of Australia (RBA) abandons the dovish forward guidance for monetary policy, and the central bank may continue to change its tune over the coming months as officials insist that “smaller and less frequent purchases of government bonds will be required” if market conditions continue to improve.
However, updates to Australia’s Employment report may rattle the recent recovery in AUD/USD as the economy is expected to shed 30.0K jobs in March, while the Unemployment Rate is projected to increase to 5.4% from 5.1% the month prior.
The economic shock from COVID-19 may put pressure on the RBA to further support the economy especially as Standard and Poor’s cuts Australia’s credit rating outlook to ‘negative’ from ‘stable,’ but it remains to be seen if Governor Philip Lowe and Co. will continue to push monetary policy into uncharted territory as TreasurerFrydenberg pledges to “do what it takes to ensure that Australia bounces back stronger.”
In turn, a sharp decline in Australia Employment may do little to influence the monetary policy outlook as the RBA insists that the “coordinated monetary and fiscal response, together with complementary measures taken by Australia's banks, will soften the expected contraction,” and the central bank may continue to tame speculation for lower interest rates as officials emphasize that “the cash rate was now at its effective lower bound.”
However, the RBA could be forced to deploy more unconventional tools as “it was likely that Australia would experience a very material contraction in economic activity, which would spread across the March and June quarters and potentially longer,” and Governor Lowe and Co. may sound more dovish at the next meeting on May 5 as “the Board is committed to doing what it can to support jobs, incomes and businesses as Australia deals with the coronavirus.”
Until then, AUD/USD may continue to retrace the sharp decline from March as it negates a bear flag formation and extends the series of higher highs and lows from the previous week, with the Relative Strength Index (RSI) highlighting a similar dynamic as it continues to track the upward trend carried over from the previous month.
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AUD/USD Rate Daily Chart
Source: Trading View
- Keep in mind, the monthly opening range has been a key dynamic for AUD/USD in the fourth quarter of 2019 as the exchange rate carved a major low on October 2, with the high for November occurring during the first full week of the month, while the low for December materialized on the first day of the month.
- The opening range for 2020 showed a similar scenario as AUD/USD marked the high of the month on January 2, with the exchange rate carving the February high during the first week of the month.
- However, the opening range for March was less relevant, with the high of the month occurring on the 9th, the same day as the flash crash.
- With that said, the rebound from the yearly low (0.5506) may continue to evolve as AUD/USD extends the series of higher highs and lows from previous week, with the Relative Strength Index (RSI) highlighting a similar dynamic as it continues to track the bullish formation carried over from the previous month.
- As a result, a break/close above the Fibonacci overlap around 0.6380 (50% expansion) to 0.6450 (38.2% expansion) brings the 0.6520 (38.2% expansion) to 0.6540 (78.6% expansion) region on the radar, with the next area of interest coming in around 0.6600 (50% expansion) to 0.6650 (61.8% expansion).
- However, AUD/USD currently sits at a key juncture as it comes up against channel resistance, with failure to break/close above the Fibonacci overlap around 0.6380 (50% expansion) to 0.6450 (38.2% expansion) raising the scope for a move back towards the 0.6310 (61.8% expansion) to 0.6340 (161.8% expansion) region.
--- Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong
