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AUD/USD Rate Faces Key Test as March High Sits on the Radar

AUD/USD Rate Faces Key Test as March High Sits on the Radar

David Song, Strategist

Australian Dollar Talking Points

AUD/USD trades to a fresh monthly high (0.6675) after breaking out of the April range, and the exchange rate faces a key test going into the end of May as it approaches the March high (0.6685).

AUD/USD Rate Faces Key Test as March High Sits on the Radar

The Australian Dollar has outperformed against all of its major counterparts so far in May, and AUD/USD may continue to exhibit a bullish behavior as governments across Australia continue to roll back the lowdown laws.

In response, the Reserve Bank of Australia (RBA) may retain the current policy at the next meeting on June 2 as “members agreed that the Bank's policy package was working broadly as expected,” and the central bank appears to be on track to carry out a wait-and-see approach over the coming months as “members assessed that the best course of action was to maintain the current policy settings and monitor economic and financial outcomes closely.

At the same time, the RBA may tame speculation for additional monetary support as “the Bank had scaled back the size and frequency of bond purchases,” and Governor Philip Lowe and Co. may continue to alter the forward guidance throughout 2020 as “a recovery could be expected to start later in 2020, supported by both the large fiscal packages and the monetary policy response.

However, it remains to be seen if the unprecedented efforts by monetary and fiscal authorities will lead to a V-shape recovery as stimulus programs like the Jobkeeper Payment is set to expire on September 27, and the RBA may come under pressure to further support the economy as “Australian GDP was expected to contract by around 10 per cent over the first half of 2020.”

With that said, the Australia Dollar is likely to face headwinds if Governor Lowe and Co. revert back to a dovish forward guidance, but AUD/USD may continue to exhibit a bullish behavior over the remainder of the month as the exchange rate breaks out of the April range and approaches the March high (0.6685).

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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) continues to evolve as AUD/USD breaks out of the April range, with the exchange rate facing a key test going into the end of May as it approaches the March high (0.6685).
  • Need a close above the former support zone around 0.6600 (50% expansion) to 0.6650 (61.8% expansion), which lines up with the 200-Day SMA (0.6656), to open up the Fibonacci overlap around 0.6720 (78.6% expansion) to 0.6800 (61.8% expansion), with the next area of interest coming in around 0.6850 (to 0.6910 (38.2% expansion).
  • However, failure to test the March high (0.6685) may push AUD/USD back towards the 0.6520 (38.2% expansion) to 0.6540 (78.6% expansion), with the next downside hurdle coming in around 0.6380 (50% expansion) to 0.6450 (38.2% expansion).
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--- Written by David Song, Currency Strategist

Follow on Twitter at @DavidJSong

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

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