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AUD/USD Threatens Ascending Channel Formation Following RBA Minutes

AUD/USD Threatens Ascending Channel Formation Following RBA Minutes

David Song, Strategist

Australian Dollar Talking Points

AUD/USD appears to be stuck in narrow range following the Reserve Bank of Australia (RBA) Minutes, but the exchange rate may exhibit a more bearish behavior over the coming days as the Relative Strength Index (RSI) snaps the upward trend carried over from the previous month.

AUD/USD Threatens Ascending Channel Formation Following RBA Minutes

AUD/USD continues to track the range bound price action from earlier this week amid the limited reaction to the RBA Minutes, but the exchange rate appears to be threatening the upward trending channel from March as the bullish momentum abates.

The RBA Minutes offered little guidance for monetary policy as officials insist that “a recovery was expected once the COVID-19 outbreak was contained,” with the central bank pledging to “do what was necessary to achieve the three-year yield target” for Australian government bonds.

The comments suggest the RBA is in no rush to deploy more unconventional tools as the unprecedented efforts taken by monetary as well as fiscal authorities are “providing considerable support to Australian households and businesses through this very difficult period,” and the central bank may merely buy time at its next meeting on May 5 as Governor Philip Lowe vows to “buy bonds in whatever quantity is required to achieve our goals.

In turn, the RBA may strike a more balanced tone over the coming months as Governor Lowe emphasizes that “this period will pass, and that a bridge has been built to get us to the other side,” but the slowdown in China, Australia’s largest trading partner, may put pressure on the central bank to further support the economy as the update to the 1Q Gross Domestic Product (GDP) report showed a larger-than-expected decline in the growth rate.

With that said, it remains to be seen if the RBA will continue to adjust the forward guidance in 2020 as Standard and Poor’s cuts Australia’s credit rating outlook to ‘negative’ from ‘stable,’ and Governor Lowe and Co. may adopt a more dovish tone over the coming months as the International Monetary Fund (IMF) forecasts Australia to contract 6.7% this year.

As a result, the weakening outlook for growth may drag on AUD/USD as Australian lawmakers remain reluctant to roll back the nationwide lockdown, and the exchange rate appears to be threatening the upward trending channel from March as the Relative Strength Index (RSI) snaps the bullish formation carried over from the previous month.

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AUD/USD Rate Daily Chart

Image of 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.
  • Nevertheless, the rebound from the yearly low (0.5506) appears to be unraveling following the string of failed attempts to break/close above the Fibonacci overlap around 0.6380 (50% expansion) to 0.6450 (38.2% expansion), with the exchange rate sitting up against channel support as it pulls back from the monthly high (0.6445).
  • The Relative Strength Index (RSI) highlights a similar dynamic and suggests the bullish momentum will continue to abate over the coming days as the oscillator snaps the upward trend carried over from the previous month.
  • Lack of momentum to hold above the 0.6310 (61.8% expansion) to 0.6340 (161.8% expansion) region brings the Fibonacci overlap around 0.6200 (78.6% expansion) to 0.6210 (78.6% expansion) on the radar, with the next area of interest coming in around 0.6080 (100% expansion) to 0.6120 (78.6% retracement) followed by the 0.6020 (50% expansion) region.
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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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