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AUD/USD Levels to Watch Following Failed Run at March High

AUD/USD Levels to Watch Following Failed Run at March High

2020-05-07 04:00:00
David Song, Strategist

Australian Dollar Talking Points

AUD/USD appears to be stuck in a narrow range as the Reserve Bank of Australia (RBA) keeps the official cash rate (OCR) at the record low of 0.25%, but the failed attempt to test the March high (0.6685) warns of a potential shift in market behavior as the exchange rate snaps the upward trending channel carried over from the previous month.

AUD/USD Levels to Watch Following Failed Run at March High

AUD/USD is little changed from earlier this week as the RBA offers little guidance ahead of its quarterly Statement on Monetary Policy, with the central bank pledging to “do whatever is necessary to ensure bond markets remain functional and to achieve the yield target for 3-year AGS (Australian Government Securities).

Image of RBA interest rate decisions

Source: RBA

The policy statement suggests the RBA will stick to a wait-and-see approach for the foreseeable future even though the baseline forecast shows output falling “by around 10 per cent over the first half of 2020 and by around 6 per cent over the year as a whole” as governments across Australia gradually rollback the lockdown laws.

Efforts to restart the economy may keep the RBA on the sidelines throughout 2020 as the central bank insists that “a stronger economic recovery is possible if there is further substantial progress in containing the coronavirus in the near term and there is a faster return to normal economic activity.

In turn, the RBA may merely buy time at the next meeting on June 2, and Governor Philip Lowe and Co. may continue to alter the forward guidance over the coming months as officials emphasize that “there has been a substantial, coordinated and unprecedented fiscal and monetary response in Australia to the coronavirus.

However, it remains to be seen if a V-shaped recover takes place as the RBA sees a more pessimistic outcome “if the lifting of restrictions is delayed or the restrictions need to be reimposed,” and the central bank may come under pressure to further support the economy as fiscal stimulus programs like the Jobkeeper Payment is set to expire on September 27.

With that said, the Australian Dollar is likely to face headwinds if the RBA reverts back to a dovish forward guidance, but the failed attempt to test the March high (0.6685) warns of a potential shift in AUD/USD behavior as the exchange rate snaps the upward trending channel 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 advance from the yearly low (0.5506) appears to have stalled ahead of the March high (0.6685) as AUD/USD finally snaps the upward trending channel, but need a close below the 0.6380 (50% expansion) to 0.6450 (38.2% expansion) region to bring the Fibonacci overlap around 0.6310 (61.8% expansion) to 0.6340 (161.8% expansion) on the radar.
  • The Relative Strength Index (RSI) highlights a similar dynamic after deviating with price as the oscillator fails to break above 70 and reverses course ahead of overbought territory.
  • Next area of interest comes in around 0.6200 (78.6% expansion) to 0.6210 (78.6% expansion) followed by the overlap around 0.6080 (100% expansion) to 0.6120 (78.6% retracement).
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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.