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AUD/USD Rate Approaches 2020 High Ahead of RBA Rate Decision

AUD/USD Rate Approaches 2020 High Ahead of RBA Rate Decision

David Song, Strategist

Australian Dollar Talking Points

AUD/USD tags a fresh weekly high (0.6952) despite the larger-than-expected expansion in US Non-Farm Payrolls (NFP), and it remains to be seen if the resilience in the Australian Dollar will persist as the Relative Strength Index (RSI) snaps the bullish trend from earlier this year.

AUD/USD Rate Approaches 2020 High Ahead of RBA Rate Decision

AUD/USD extends the series of higher highs and lows from earlier this weekamid the limited reaction to the NFP report, and the exchange rate may continue to approach the yearly high (0.7064) ahead of the Reserve Bank of Australia (RBA) interest rate decision on July 7 as the central bank is widely expected to keep the official cash rate (OCR) at the record low of 0.25%.

Image of DailyFX economic calendar for Australia

It seems as though the RBA will carry out a wait-and-see approach in the second half of 2020 as Deputy Governor Guy Debelle insists that “the Australian economy has turned out to be somewhat better in the June quarter than feared,” and the central bank may continue to tame speculation for additional monetary support as “the RBA has not needed to buy any bonds since early May.”

In turn, the RBA may largely reiterate that “the Board will not increase the cash rate target until progress is being made towards full employment,” and more of the same from the central bank may keep the Australian Dollar afloat as “members agreed that the Bank's policy package was working broadly as expected.”

Looking ahead, the RBA may gradually alter the forward guidance over the coming months as “it is possible that the depth of the downturn will be less than earlier expected,” but a growing number of officials may attempt to jawbone the local currency as Governor Philip Loweasserts that a lower Australian Dollar would help to lift inflation.

At the same time, the RBA may rely on fiscal authorities to further support the economy as board member Ian Harper insists that the government should set up a “tapering arrangement” as programs like the Jobkeeper Paymentis set to expire on September 27.

However, Treasurer Josh Frydenberg may continue to show little interest in extending the stimulus programs as Standard and Poor’s and Fitch Ratings cut Australia’s credit rating outlook to ‘negative’ from ‘stable, and Governor Lowe and Co. may come under pressure to deploy more unconventional tools as the cash rate sits at the effective lower bound (ELB).

Until then, the resilience in the Australian Dollar looks poised to persist as the RBA scales back its bond purchases, but recent developments in the Relative Strength Index (RSI) warn of a potential shift inAUD/USD behavior as the indicator falls back from overbought territory and snaps the bullish trend from earlier this year.

Sign up and join DailyFX Currency Strategist David Song LIVE for an opportunity to discuss potential trade setups.

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.
  • AUD/USD appears to be stuck in a narrow range after trading to a fresh 2020 high (0.7064) in June, but the failed attempt to of the July 2019 high (0.7082) may lead to a near-term correction in the exchange rate as the RSI snaps the bullish trend from earlier this year.
  • Lack of momentum to push back above the 0.6970 (23.6% expansion) to 0.6980 (23.6% expansion) region keeps the Fibonacci overlap around 0.6720 (78.6% expansion) to 0.6800 (61.8% expansion) on the radar as AUD/USD consolidates within the June range.
  • Need a break/close above the 0.6970 (23.6% expansion) to 0.6980 (23.6% expansion) region to open up the 2020 high (0.7064), with the next area of interest coming in around 0.7090 (78.6% retracement), which largely lines up with the July 2019 high (0.7082).
  • However, a break/close below Fibonacci overlap around 0.6720 (78.6% expansion) to 0.6800 (61.8% expansion) opens up the downside targets, with the first area of interest coming in around 0.6600 (50% expansion) to 0.6650 (61.8% expansion), which largely lines up with the June low (0.66480).
  • Next area of interest comes in around 0.6520 (38.2% expansion) 0.6540 (78.6% expansion) followed by the overlap around 0.6380 (50% expansion) to 0.6450 (38.2% expansion).

--- 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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