Australian Dollar Forecast: Bearish
- The Australian Dollar has seen some strong bullish momentum recently
- The weaker USD has been a key driver to boost many other currencies and commodities
- The rally peaked on Friday, will AUD/USD retreat further?
The Australian dollar stacked on the gains last week capitalising on a U.S. dollar that appears vulnerable with a tilt in the outlook for the monetary policy path of the Federal Reserve.
The US dollar has taken a hit across the board losing ground against all major currencies and lifting commodity prices.
The US Dollar (DXY) Index fell 2.26% for the week with several of Australia’s key exports moving to higher ground. Notably, iron ore, copper, gold and wheat prices were hoisted to higher ground.
CHART - AUD/USD, GOLD, COPPER, IRON ORE, WHEAT AND DXY (USD) INDEX
The big dollar went South along with treasury yields in the aftermath of softer inflation readings. Both the CPI and the PPI gauges printed below expectations.
The month-on-month headline CPI gauge for June was 0.2% instead of 0.3% anticipated and against 0.1% previously to give a year-on-year number of 3.0%, slightly less than forecasts of 3.1% and 4.0% prior.
Looking at core CPI, it too was lower than estimates. The month-on-month read for June was 0.2%, below forecasts of 0.3% and 0.4% previously. Year-on-year it was 4.8%, softer than the 5.0% anticipated and 5.3% prior.
The easing of price pressures saw Treasury yields tumble across all tenors, particularly in the 2 to 10-year part of the curve.
On the domestic front, the Australian Government appointed Michelle Bullock to the role of governor of the Reserve Bank of Australia during the week.
Her credentials as a central banker are highly regarded and the decision represents a steady transfer of the leadership at the bank. Ms Bullock's approach to monetary policy appears likely to be similar to her predecessors.
In a recent speech, she remarked that the unemployment rate may need to get to 4.5% well above the current level of 3.6% in order to put the inflation genie back in the bottle.
Interest rate markets are pricing in a very low probability of a hike by the RBA at their August monetary policy meeting.
However, a 25 basis point lift in rates is anticipated by the market before the end of the year. Quarterly Australian inflation data will, be released on the 26th of July and might be crucial in the outlook for the RBA’s monetary policy path.
Ahead of CPI and PPI, the June unemployment rate will be published this coming Thursday with a Bloomberg survey of economists looking for it to remain unchanged at 3.6%.
China remains a potential curveball for AUD/USD with stimulus policy on the agenda. Beijing announced some measures last week and their GDP figures will be watched closely on Monday. Further headlines could create some volatility for markets.
AUD/USD CHART
AUD/USD has been in a five-month trading range of 0.6459 – 0.6900 and it failed to break the upper bound on Friday and has potentially set up a Double Top.
A break above 0.6920 would negate the pattern, but as long as it stays below that level, potential bearishness may unfold.
Resistance could be in the 0.6900 and 0.6920 zone ahead of possible resistance in the 0.7010 – 0.7030 area where several previous peaks lie,
On the downside, support might be at the breakpoints of 0.6818, 0.6806. 0.6803 and 0.6741 ahead of the prior low of 0.6595.
For the bulls, the latest rally saw the price break cleanly above all period daily Simple Moving Averages (SMA). This might indicate that bullish momentum could evolve.
Those SMAs may provide support in the 0.6780 – 0.6820 area. It is rare for all of these SMAs to be clustered so close together and this might be hinting toward an emerging trend.
--- Written by Daniel McCarthy, Strategist for DailyFX.com
Please contact Daniel via @DanMcCarthyFX on Twitter
