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AUD/USD Fails to Test June High Despite ‘New Phase’ of Fiscal Stimulus

AUD/USD Fails to Test June High Despite ‘New Phase’ of Fiscal Stimulus

2020-07-10 02:00:00
David Song, Strategist
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Australian Dollar Talking Points

AUD/USD tags a fresh monthly high (0.7001) as Australian Treasurer Josh Frydenberg plans to unveil a “new phase” of fiscal support, but lack of momentum to test the June high (0.7064) may generate range bound conditions as the Relative Strength Index (RSI) appears to be reversing course ahead of overbought territory.

AUD/USD Fails to Test June High Despite ‘New Phase’ of Fiscal Stimulus

AUD/USD trades marginally higher from earlier this week despite the limited reaction to the Reserve Bank of Australia (RBA) interest rate decision, and the exchange rate may stay afloat over the coming days as Treasurer Frydenberg pledges to announce more temporary measures to support Australian households on July 23.

Another batch of fiscal stimulus is likely to keep the RBA on the sidelines as the central bank vows to “not increase the cash rate target until progress is being made towards full employment,” and it seems as though Governor Philip Lowe and Co. will retain a wait-and-see approach throughout the second half of 2020 as the economic shock from COVID-19 “has been less severe than earlier expected.

In turn, the RBA may prepare to remove the yield target for 3-year Australian Government Securities (AGS) as “the Bank has not purchased government bonds for some time,” and the Australian Dollar may continue to trade to fresh yearly highs against its US counterpart if the central bank alters the forward guidance over the coming months.

However, the renewed cases of COVID-19 may force the RBA to further support the Australian economy as Victoria reinstates stage 3 lockdown, and the central bank may stick to the same script at the next interest rate decision on August 4 as “the nature and speed of the economic recovery remains highly uncertain.

Until then, the resilience in AUD/USD may persist as the RBA refrains from bond purchases, but lack of momentum to test the 2020 high (0.7064) may generate range bound conditions in the exchange rate as the RSI appears to be reversing course ahead of overbought territory.

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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.
  • AUD/USD appears to be stuck in a narrow range after trading to a fresh 2020 high (0.7064) in June, and the exchange rate may continue to consolidate in July as the RSI fails to retain the bullish trend from earlier this year and appears to be reversing course ahead of overbought territory.
  • Lack of momentum to hold 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 the RSI starts to establish a negative slope.
  • A break/close below the Fibonacci overlap around 0.6720 (78.6% expansion) to 0.6800 (61.8% expansion) opens up the 0.6600 (50% expansion) to 0.6650 (61.8% expansion) region, which largely lines up with the June low (0.66480), with the next area of interest comes in around 0.6520 (38.2% expansion) 0.6540 (78.6% expansion)
  • Waiting for a series of closing prices above the 0.6970 (23.6% expansion) to 0.6980 (23.6% expansion) region to bring the 2020 high (0.7064) on the radar, 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).
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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.

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