The following article was written by Ipek Ozkardeskaya, Senior Market Analyst at FCA regulated broker London Capital Group Holdings plc (LON:LCG).
In an exponential fashion, the Australian dollar gained more than 10% against the US dollar since May. The recovery in the Chinese data, combined with a flattening US yield curve brought the carry traders back in the market and pushed the Aussie above its 200-week moving average, 0.8005, for the first time in four years.
AUD bulls’ motivation
The AUD-bulls are motivated by the improved Chinese data, the rebound in commodity prices and the waning of the recent sovereign rally that particularly hit the Eurozone and the US markets.
According to the latest Bloomberg survey, the Aussie is expected to remain within the 0.7690/0.8085 range through the month ahead, with more than 70% chances.
Price pullbacks to wet traders’ appetite
In the aftermath of a three-week rally and after having spent the majority of July in the overbought territory (daily RSI above 70%), the AUDUSD is about to step in the overbought market on weekly basis.
It may be healthier for the Aussie to take a breather at the current levels. The softer-than-expected 2Q inflation and Reserve Bank of Australia (RBA) Governor Philip Lowe’s dovish comments gave a plausible set for the AUD-bulls to take a break, yet the dovish shift in Federal Reserve (Fed) expectations ruined the setting.
After all, the inflation data was not a big letdown
Australia’s headline inflation unexpectedly retreated to 1.9%y/y in the second quarter from 2.1% printed a quarter earlier and disappointing analysts expecting a rise to 2.2%.
Although the latest read has been a discouragement for the RBA hawks, it is worth reminding that the Australian inflation increased from 1% to above 2% over the past twelve months. Therefore, the macroeconomic conditions could still justify an interest rate action in 2018.
Yet May’18 expectations have fallen to 51% posterior to the data from 56%.
Governor Lowe could talk down the Aussie
The RBA will hold a monetary policy meeting next week and is expected to maintain its cash rate target unchanged at 1.50%. The accompanying statement will likely be balanced to avoid any hawkish illusion regarding the foreseeable future.
Next week’s RBA meeting will be a golden opportunity for Governor Lowe to talk down the Aussie. In his Tuesday speech, Lowe said it is ‘better if the AUD is a bit lower’, suggesting that the bank’s rhetoric will certainly reflect the policymakers’ reluctance vis-à-vis a further AUD appreciation.
Hence, the Aussie gains could be at risk next week.
The current trading levels will either define a trend top before a natural downside correction in the AUDUSD, or mark the beginning of a mid-term appreciation in the Aussie against the RBA’s will.
Price pullbacks will certainly be interesting dip-buying opportunities for the carry lovers. Support to the May – July rising trend is seen at 0.8005 (200-week moving average), 0.7901 (minor 23.6% retracement) and 0.7800 (major 38.2% retracement).