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AUD/USD Rate to Stay Afloat as RBA Refrains from Bond Purchases

AUD/USD Rate to Stay Afloat as RBA Refrains from Bond Purchases

David Song,
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Australian Dollar Talking Points

AUD/USD trades near the monthly high monthly high (0.7001) ahead of the Reserve Bank of Australia (RBA) Minutes, and the statement may keep the exchange rate afloat as the “Bank has not purchased government bonds for some time.”

AUD/USD Rate Outlook Mired by Failure to Test 2020 High

AUD/USD appears to be stuck in a narrow range following Australia’s Employment report, which showed the rebound in job growth largely driven by part-time positions (+249.0K), while full-time jobs narrowed (-38.1K) for the fourth consecutive month in June.

Nevertheless, a deeper look at the report revealed a larger-than expected uptick in the Participation Rate, with the gauge widening to 64.0% from a revised 62.7% in May amid forecasts for a 63.3% print. It remains to be seen if the update will influence the monetary policy outlook as discouraged workers return to the labor force, but the RBA Minutes are likely to mimic the policy statement from the July interest rate decision as the central bank pledges to “not increase the cash rate target until progress is being made towards full employment.”

Image of RBA interest rate

Source: RBA

More of the same from the RBA may keep AUD/USD afloat as Deputy Governor Guy Debelle emphasizes that “if the three-year bond yield target is credible to the market, then the Reserve Bank does not need to purchase many bonds at all to achieve the target,” and the central bank may continue to carry out a wait-and-see approach 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 later this year, but Governor Philip Lowe and Co. appear to be in no rush to start normalizing monetary policy as fiscal programs like the Jobkeeper Paymentis set to expire on September 27.

With that said, the RBA may stick to the sidelines at the next rate decision on August 4, and the resilience in the Australian Dollar may persist in the month ahead as the “Bank has not purchased government bonds for some time.”

However, lack of momentum to test the 2020 high (0.7064) may generate range bound conditions in AUD/USD, with the exchange rate susceptible to a near-term correction as the advance from earlier this month fails to trigger an extreme reading in the Relative Strength Index (RSI).

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AUD/USD Rate Daily Chart

Image of AUD/USD rate daily chart

Source: Trading View

  • Keep in mind, 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 January high (0.7016) in June as the Relative Strength Index (RSI) pushed into overbought territory.
  • AUD/USD appeared to be on track to test the June high (0.7064) following the break/close above the 0.6970 (23.6% expansion) to 0.6980 (23.6% expansion) region, but the exchange rate may trade within a more defined range as the advance from the start of July fails to trigger an extreme RSI reading, with the oscillator 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 may push AUD/USD back towards the Fibonacci overlap around 0.6850 (50% expansion) to 0.6910 (38.2% expansion), which largely lines up with the July low (0.6877).
  • Next area of interest coming in around 0.6720 (78.6% expansion) to 0.6800 (61.8% expansion) followed by the overlap around 0.6600 (50% expansion) to 0.6650 (61.8% expansion), which largely lines up with the June low (0.66480).
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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.