Australian Dollar Talking Points

AUDUSD holds a narrow range following the 41.0K expansion in Australia Employment, and the Reserve Bank of Australia (RBA) Minutes may keep the exchange rate afloat should the central bank endorse a wait-and-see for monetary policy.

AUDUSD Rate Outlook Hinges on Reserve Bank of Australia (RBA) Minutes

AUDUSD may attempt to extend the rebound from the yearly-low (0.6677) as fresh data prints coming out of Australia show little indications of a looming recession, and the RBA may adopt a less dovish tone ahead of the next meeting on September 3 as “the central scenario is for the Australian economy to grow by around 2½ per cent over 2019 and 2¾ per cent over 2020.’

The RBA Minutes may tame speculation for lower interest rates as the central bank insist that “the Australian economy can sustain lower rates of unemployment,” and Governor Philip Lowe & Co. may show a greater willingness to retain the current policy for the foreseeable future as “the outlook for the global economy remains reasonable.”

However, the RBA may keep the door open to further insulate the economy as the US and China, Australia’s largest trading partner, struggle to reach a trade deal, and the central bank may reiterate its pledge to “ease monetary policy further if needed” especially as the People’s Bank of China (PBoC) weaken the Yuan reference rate.

It remains to be seen if the US-China dispute will lead to a currency war as the PBOC insists that it “will not engage in competitive devaluation and will not use the exchange rate as a tool to deal with international trade disputes,” but fresh remarks from RBA Assistant GovernorChristopher Kent suggest the central bank will continue to utilize the official cash rate (OCR) to address the downside risks surrounding the region as “financial market prices currently imply that the cash rate is expected to be reduced by a further 25 basis points later this year and then again in the first half of next year.”

In turn, the RBA Minutes may produce headwinds for the Australian dollar, with AUDUSD at risk of facing a more bearish fate if the RBA prepares households and businesses for lower interest rates.

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AUD/USD Rate Daily Chart

Keep in mind, the AUDUSD rebound following the currency market flash-crash has been capped by the 200-Day SMA (0.70 59 ), with the exchange rate marking another failed attempt to break/close above the moving average in July.

With that said, the broader outlook for AUDUSD remains tilted to the downside as both price and the Relative Strength Index (RSI) continue to track the bearish formations from late last year.

However, the string of failed attempts to close below the Fibonacci overlap around 0.6720 (78.6% expansion) to 0.6730 (100% expansion) raises the risk for a larger rebound especially as the RSI bounces back from oversold territory, with the oscillator now carving a bullish formation.

As a result, another move above the 0.6800 (61.8% expansion) handle may spur a more meaningful run at the former-support zone around 0.6850 (78.6% expansion) to 0.6880 (23.6% retracement) , with the next area of interest coming in around 0.6910 (38.2% expansion).

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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.