The Australian Dollar's Strength is Starting to "Run Ahead of itself" Argue UOB
Technical analysts at UOB and fundamental analysts at Citibank create a compelling picture for the AUD/USD outlook.
At the start of the week we reported that the Aussie should advance against the US Dollar further with based on the analysis conducted by Quek Ser Leang at UOB in Singapore.
“Based on the strong shorter-term momentum indicators, a move above 0.7675 would not be surprising,” Leang told clients in a recent strategy note.
AUD/USD is now trading at 0.7683 confirming the initial target has been met.
What does Leang think of the pair's prospects now? Leang tells us:
"The anticipated AUD strength exceeded our expectation by breaking above the major 0.7675 resistance
(high of 0.7695).
"While further AUD strength seems likely in the days ahead, the current rally appears to be running ahead of itself and a sustained break above 0.7695/00 seems unlikely. From here, allow for a dip to 0.7645/50 but 0.7620 is expected to hold for a retest of 0.7695/00."
The analyst notes that only a move back below 0.7560 would, “indicate that immediate pressure had eased.”
\our own analysis suggested the pair was consolidating in a flag type pattern outlined in red on the chart below:
This could also be a broadening pattern, in which case it would have bearish forecasting value rather than bullish.
A breakout above the pattern, confirmed by a move above 0.7715 would lead to a probable move up to the next major resistance level at 0.7800.
This would also be supported by MACD, which is poking above the zero-line in the lower pane.
We therefore want to see more strength before becoming outright bullish.
Alternatively, a moved down within the range is also still a possibility, with a move down clearly below the 50-day moving average and the monthly pivot (PP), a line of support traders use to gauge the trend, at 0.7520 would lead to a free run down to the next target at the 0.7415.
Fundamentals Point to Better Support for AUD Argue Citi
While technicals are mixed the Australian Dollar’s fundamental profile is more constructive say researchers at Citibank.
They noted how a recent speech from the new governor of the Reserve Bank of Australia (RBA), Philip Lowe, indicated a lower chance of the RBA cutting interest rates than previously thought.
This is obviously positive news for the Aussie since the relatively high interest rates in Australia, at 1.50%, attract lots of inflows of foreign capital seeking the 1.5% guaranteed return.
In his speech, Governor Lowe suggested that he might tolerate inflation undershooting the 2-3% target.
This indicates the Reserve Bank is less likely to cut rates if inflation fails to hit target.
He said core commodities were unlikely to fall in value, and they are a key export of Australia, and that this would improve Australia’s ‘terms of trade’.
‘Terms of trade’ is the difference between the aggregate value of exports and imports. When it is positive it helps support the local currency.
Lowe said that the drag in mining investment was almost done and had fallen 75% of its likely total reach.
“RBA Governor Lowe’s comments to the Australian parliament yesterday appear to be breaking new ground and follow the relatively upbeat comments from Assistant Governor Kent last week and while this does not suggest a formal move to a neutral bias, the comments certainly raise the bar for further easing,” say Citi.
Citi say the market is now pricing in a 40% chance of the RBA cutting interest rates in the next 6-months.
A major consideration in rate cut expectations is the release of Australian Q3 CPI on October 2.
