It’s been an interesting week for the AUD/USD, as the recent statement from Governor Glenn Stevens, coupled with continued bullish momentum for the US dollar, has seen the pair pick up the bearish tone once again. Tuesday’s decision by the RBA to keep rates on hold came as no great surprise to the market, with the bank holding the cash rate target at 2.5%, given the concerns over slowing growth in China and the knock-on effect in terms of demand for commodities, in particular iron ore.
In his statement Governor Stevens reiterated his comments from last month saying: “The Australian dollar remains above most estimates of its fundamental value”, before adding: "A lower exchange rate is likely to be needed to achieve balanced growth in the economy’. He also included the following: ‘The most prudent course is likely to be a period of stability in interest rate."
In other words, the consensus view is for a rate cut in the next 12 months, and should the slowdown in China continue, this may happen sooner rather than later. There has been a distinct change of tone from the RBA as the bank does all it can to weaken the Australian dollar.
From a technical perspective, whilst the comments from the RBA have been helpful over the last few months, it is the resurgence in the US dollar, which has helped to drive this and other major currency pairs lower. The dollar index continues to climb, having risen from the lows of 78.93 in the summer, to currently trade at 88.73 at time of writing.
Since mid November the index has traded in a narrow range, but yesterday’s strong gains now appear to be the trigger for a breakout from this congestion phase, and the springboard for a further move higher in the run to the end of the year.
For the AUD/USD, the congestion phase of the last few days is now breaking down once again, with Monday’s doji candle hinting at a possible pause, before yesterday’s rally ran into resistance in the 0.8450 area, closing lower with a deep wick to the upper body and signalling further weakness. This has duly been delivered overnight, aided and abetted by much weaker than expected GDP figures, and carried forward into this morning’s London session with the pair trading lower again at 0.8406 at time of writing. With the deep area of price resistance now overhead, and with the twin drivers of the RBA and the US dollar acting in concert, the AUD/USD looks set to fall further and down to the next minor level of support in the 0.8300 area.
The currency strength indicator to the left of the chart confirms this picture for the daily timeframe, with the Aussie dollar, the blue line, continuing to fall, and with some way to go before it reaches an oversold state. At the same time the red line, the US dollar, continues to climb as bullish sentiment remains firmly in place for the currency of first reserve.
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