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AUD/USD Rate to Face Another Sharp Decline in Australia Employment

AUD/USD Rate to Face Another Sharp Decline in Australia Employment

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Australian Dollar Talking Points

AUD/USD struggles to retain the rebound from earlier this week amid renewed cases of COVID-19 in China, Australia’s largest trading partner, and recent developments in the Relative Strength Index (RSI) warn of a larger correction in the exchange rate as the indicator falls back from overbought territory and offers a textbook sell signal.

AUD/USD Outlook Mired by RSI Sell Signal Ahead of Fed Testimony

AUD/USD pulls back from the weekly high (0.6977) after showing a limited reaction to the Reserve Bank of Australia (RBA) Minutes, but the update to Australia’s Employment report may influence the exchange rate as the economy is expected to shed 125K job in May.

Image of DailyFX economic calendar for Australia

At the same time, the jobless rate is projected to increase to 7.0% from 6.2% in April, which would mark the highest reading since 2002, and the ongoing slump in the labor market may drag on the Australian Dollar as it puts pressure on the RBA to further support the economy.

However, it remains to be seen if the data will influence the monetary policy outlook as RBA “members agreed that the Bank's policy package was working broadly as expected,” with the minutes from the June meeting revealing that the “Bank had purchased government bonds on only one occasion since the previous meeting.”

It seems as though the RBA has little intentions of implementing more non-standard measures as “it was possible that the downturn would be shallower than earlier expected,” and Governor Philip Lowe and Co. may continue to tame speculation for additional monetary support amid the success in keeping the yield for the 3-year Australian Government bonds around 25bp.

In turn, the RBA appears to be on track to carry out a wait-and-see approach throughout the remainder of the year as the central bank pledges to “not increase the cash rate target until progress is made towards full employment,” but the threat of a protracted recovery may force the central bank to further support the Australian economy as fiscal stimulus programs like the Jobkeeper Paymentis set to expire on September 27.

With that said, AUD/USDmay struggle to hold its ground ahead of the next RBA meeting on July 7 as the renewed cases of COVID-19 in China undermine the scope for a V-shape recovery in the Asia/Pacific region, with the Relative Strength Index (RSI) warning of a larger correction in the exchange rate as the indicator falls back from overbought territory and offers a textbook sell signal.

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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) gathered pace as AUD/USD broke out of the April range, with the exchange rate clearing the February high (0.6774) as the Relative Strength Index (RSI) pushed into overbought territory.
  • Recent price action warns of a near-term correction in AUD/USD as the advance from earlier this month fails to produce a test of the July 2019 high (0.7082), with the RSI highlighting a similar dynamic as the oscillator pushes below 70 and offers a textbook sell signal.
  • Will keep a close eye on the RSI as it falls back from overbought territory and threatens the bullish formation from earlier this year.
  • The failed attempt to test the 0.7090 (78.6% retracement) hurdle has pushed AUD/USD towards the Fibonacci overlap around 0.6720 (78.6% expansion) to 0.6800 (61.8% expansion), with the next region of interest coming in around 0.6600 (50% expansion) to 0.6650 (61.8% expansion).
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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.