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AUD Rates Hold May Range Despite Record Drop in Australia Employment

AUD Rates Hold May Range Despite Record Drop in Australia Employment

David Song, Daniel Moss,

Australian Dollar Talking Points

AUD/USD struggled to hold its ground following the 594.3K decline in Australia Employment, but the exchange rate may face range bound conditions as the decline from earlier this month fails to spur a test of the May low (0.6373).

AUD Rates Hold May Range Despite Record Drop in Australia Employment

AUD/USD bounces back from fresh weekly low (0.6403) despite the record drop in Australia Employment, and the fresh data prints may do little to sway monetary policy as the jobless rate climbed to 6.2% from 5.2% in March amid projections for an 8.2% print.

However, the smaller-than-expected uptick in unemployment was accompanied by a marked decline in the Labor Force Participation rate, with the figure narrowing to 63.5% from 66.0% to mark the lowest reading since 2004.

It remains to be seen if the Reserve Bank of Australia (RBA) will respond to the dismal data prints as the central bank insists that the unprecedented measures taken by monetary as well as fiscal authorities are “supporting the economy right now and will help when the recovery comes.”

It seems as though the RBA will carry out a wait-and-see approach as governments across Australia roll back the lockdown laws, and Governor Philip Lowe and Co. appear to be in no rush to further support the economy as the central bank pledges to “not increase the cash rate target until progress is being made towards full employment.”

In turn, the RBA may merely attempt to buy time at its next meeting on June 2 as “gradual recoveries should follow in the second half of the year, supported by the easing of restrictions and the significant expansion in both fiscal and monetary policies,” and the central bank may continue to alter the forward guidance over the coming months as “the Bank has scaled back the size and frequency of bond purchases.”

However, the threat of a protracted recovery may put pressure on the RBA to deploy more unconventional tools as fiscal stimulus programs like the Jobkeeper Payment is set to expire on September 27, and the Australia Dollar is likely to face headwinds if Governor Lowe and Co. revert back to a dovish forward guidance in the months ahead.

With that said, 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, but the Aussie Dollar may face range bound conditions over the coming days as the decline from earlier this month fails to spur a test of the May low (0.6373).

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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 was 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, with the Relative Strength Index highlighting a similar dynamic as the oscillator fails to break above 70 and reverses course ahead of overbought territory.
  • A similar scenario appears to have taken shape in May as the advance from earlier this month stalls ahead of the April high (0.6570), but AUD/USD may face range bound conditions over the coming days as the decline from the monthly high (0.6561) fails to produce a test of the May low (0.6373).
  • As a result, need a break/close below the 0.6380 (50% expansion) to 0.6450 (38.2% expansion) region to open up the Fibonacci overlap around 0.6310 (61.8% expansion) to 0.6340 (161.8% expansion).
  • 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).

AUD/JPY Rate Daily Chart

Image of AUD/JPY rate daily chart

Source: Trading View

  • AUD/JPY has grinded higher after trading to 11-year lows in March (59.87),and the exchange rate may attempt one last push to test the monthly-highs (70.15) amid the reaction to the 50-EMA (68.80), with the exponential moving average still tracking the 61.8% Fibonacci retracement of the yearly decline (68.67).
  • However, a bearish pattern (double-top reversal) may take shape at the April-high (70.17) as the Relative Strength Index (RSI) deviates with price, and the oscillator may threaten the upward trend from March as it approaches trendline support.
  • Momentum highlights a similar dynamic with the RSI, and the indicator may provide a bearish signal if it continues to diverge with price and pushes into negative territory.
  • The developments may force AUD/JPY trades to eye support at the 23.6% Fibonacci retracement (67.74) of the rally from the March-lows, with a daily break and close below this level highlighting a potential shift in market sentiment along with a move towards ascending channel support and the April-low (64.39).
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--- Written by David Song, Currency Strategist and Daniel Moss

Follow on Twitter @DavidJSong and @DanielGMoss

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.