Australian Dollar Talking Points

AUDUSD extends the decline from earlier this week as Reserve Bank of Australia (RBA) Governor Philip Lowe strikes a dovish tone, and recent price action raises the risk for a further decline as the rebound from the June-low (0.6832) stalls ahead of the 200-Day SMA (0.7087).

AUDUSD Rate Capped by 200-Day SMA Ahead of Australia Inflation Report

A recent speech by Governor Lowe has weighed on the Australian dollar as the central bank head states that “if demand growth is not sufficient, the Board is prepared to provide additional support by easing monetary policy further.”

The comments suggest the RBA will continue to insulate the economy as the US and China, Australia’s largest trading partner, struggles to reach a trade agreement, but it remains to be seen if Governor Lowe & Co. will take additional steps after delivering back-to-back rate cuts as “the underlying foundations of the Australian economy remain strong.”

With that said, updates to Australia’s Consumer Price Index (CPI) may curb the recent decline in AUDUSD as the headline reading is anticipated to widen to 1.5% from 1.3% annum during the first quarter of 2019. However, a slowdown in the core rate of inflation may produce a mixed reaction, with the Australian dollar at risk of facing headwinds as below-target price growth puts pressure on the RBA to further embark on its rate easing cycle.

In turn, AUDUSD stands at risk of facing a further decline ahead of the Federal Reserve interest rate decision on July 31, and the advance from the June-low (0.6832) may continue to unravel as the exchange rate remains capped by the 200-Day SMA (0.7087).

Keep in mind, the AUDUSD rebound following the currency market flash-crash has been capped by the 200-Day SMA (0.7087), with the exchange rate marking another failed attempt to break/close above the moving average in July.

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AUD/USD Rate Daily Chart

T he 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.

Moreover, the advance from the June-low (0.6832) has sputtered ahead of the Fibonacci overlap around 0.7080 (61.8% retracement) to 0.7110 (78.6% retracement) , which lines up with the 200-Day SMA (0.7090) , with AUDUSD carving a fresh series of lower highs and lows.

In turn, a close below the 0.6950 (61.8% expansion) to 0.6960 (38.2% retracement) region raises the risk for a run at the monthly-low (0.6911), with the next area of interest coming in around 0.6850 (78.6% expansion) to 0.6880 (23.6% retracement).

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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.