Australian Dollar Talking Points

AUDUSD appears to be making another run at the May-high (0.7061) as the exchange rate extends the series of higher highs and lows from the previous week, and the Reserve Bank of Australia (RBA) Minutes may fuel the recent rebound in the Australian Dollar should the central bank tame speculation for another rate cut in 2019.

AUDUSD Rate to Target May High on Less Dovish RBA Minutes

AUDUSD extends the rebound from the monthly-low (0.6911) even though China, Australia’s largest trading partner, marks the slowest pace of growth since record keeping began in 1992, and the current environment may keep the exchange rate afloat as the Federal Reserve is widely expected to deliver an “insurance cut” at the next interest rate decision on July 31.

The Federal Open Market Committee (FOMC) appears to be on track to insulate the US economy as “many participants indicated that the case for somewhat more accommodative policy had strengthened,” and the US Dollar may face a more bearish fate over the coming days as Fed Fund futures show a 100% probability for at least a 25bp reduction in the benchmark interest rate.

In contrast, the RBA may show a greater willingness to revert back to a wait-and-see approach after delivering two consecutive rate cuts, and the central bank may strike a more balanced tone ahead of next meeting on August 7 as “the central scenario for the Australian economy remains reasonable.”

Keep in mind, the RBA is likely to reiterate its pledge to “adjust monetary policy if needed” as the US and China struggle to reach a trade deal, but it seems as though the central bank is in no rush to extend its rate easing cycle as “the central scenario remains for underlying inflation to be around 2 per cent in 2020 and a little higher after that.”

As a result, the RBA minutes from the July meeting may ultimately fuel the recent rebound in AUDUSD, with the exchange rate at risk of making another run at the May-high (0.7061) should Governor Philip Lowe and Co. soften the dovish forward guidance for monetary policy.

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AUD/USD Rate Daily Chart

The AUDUSD rebound following the currency market flash-crash has been capped by the 200-Day SMA (0.7091), with the exchange rate marking another failed attempt to break/close above the moving average in April.

In turn, the broader outlook for AUDUSD remains tilted to the downside, with the exchange rate still at risk of giving back the rebound from the 2019-low (0.6745) as both price and the Relative Strength Index (RSI) continue to track the bearish formations from late last year.

More recently, the advance from June-low (0.6832) appears to have stalled ahead of the May-high (0.7061) , but the string of higher highs and lows in the exchange rate raises the risk for a larger rebound.

Need a break of the May-high (0.7061) to open up the Fibonacci overlap around 0.7080 (61.8% retracement) to 0.7110 (78.6% retracement), with the next topside hurdle coming in around 0.7180 (61.8% retracement).

However, another failed attempt to test the May-high ( 0.7061 ) may bring the downside targets back on the radar, with a move below 0.7020 (50% retracement) raising the risk for a move back towards the 0.6950 (61.8% expansion) to 0.6960 (38.2% retracement) region.

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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.