The RBA is Ready to Rock but AUD May Still Struggle

Australian Dollar Forecast: Bullish

• The Australian Dollar has been caught in the US Dollar vortex
• Australian CPI data is running hotter than elsewhere, presenting problems
• The RBA are signalling for a hike. Will it lift AUD/USD and AUD/JPY?

The Australian Dollar went on a wild ride last week, trading between 0.6270 and 0.6400 with CPI data and the RBA (Reserve Bank of Australia) weighing into the currency moves.

Overall, the market does not appear to be listening to the RBA. This is what they have said over the last fortnight. Skip through this part if you have read my prior articles, but it is worth revisiting.

Wednesday 11th – RBA Assistant Governor Chris Kent said, “Some further tightening may be required to ensure that inflation, that is still too high, returns to target.”

Tuesday 17th October – RBA October meeting minutes published and stated, “The Board has a low tolerance for a slower return of inflation to target than currently expected. Whether or not a further increase in interest rates is required would, therefore, depend on the incoming data and how these alter the economic outlook and the evolving assessment of risks.”

Wednesday 18th October – RBA Governor Michele Bullock said, “The problem is we’ve had shock after shock after shock. The more that keeps inflation elevated, even if it’s from supply shocks, the more people adjust their thinking.”

Tuesday 24th October – RBA Governor Michele Bullock said in regard to getting inflation down, “It is possible that this can be done with the cash rate at its current level but there are risks that could see inflation return to target more slowly than currently forecast. The Board will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation.”.

She also restated, “The Board has been clear that it has a low tolerance for allowing inflation to return to target more slowly than currently expected.”

Wednesday 25th October – CPI prints above expectations. Most significant is that the quarter-on-quarter read for both the headline and trimmed mean measure reaccelerated through the third quarter. Click on this link for more CPI details.

Thursday 26th – RBA Governor Michele Bullock appeared at a Senate estimate hearing and batted off questions of the Bank’s intention to raise rates or not at the November 7th monetary policy meeting by saying, “We’re still analysing it.”

And rightly so, it is a week and a half before the board sits down to contemplate if a tightening is warranted or not and given the dramatic events unfolding globally, literally anything could happen between now and then.

Having said that, from what we know right now, a 25 basis point rate hike is on the cards next month, as cited in this article a week ago.

Some mainstream media outlets are jumping up and down in panic at such a prudent move. The macroeconomic luddites appear to be unaware of the havoc and damage that high and uncontrolled inflation can wreak on society.

Argentina was once a world superpower. It currently has 130% annualised inflation with 40% of its population living below the poverty line.

The hyperinflation seen in the Weimar Republic in the 1930s is cited by many historians as a significant contributing factor to the eventual outbreak of World War 2.

Tight monetary policy creates many kinds of discomfort and some cohorts of society feel the pain of these conditions far more than other parts. However, the cost of runaway prices is far greater.

For the Aussie Dollar though, an RBA rate hike may or may not give the currency a boost. The US Dollar is doing its usual thing and dominating proceedings.

Treasury yields in the world’s largest economy have whipsawed dramatically over the last fortnight, throwing multiple curve balls at markets.

This has seen volatility shift higher across many asset classes as seen in the chart below. The implication for AUD/USD is a challenging circumstance.

VOLATILITY ACROSS GOLD, OIL, BONDS AND EQUITIES

Chart created in TradingView

With violent price action, investors and traders often tend to head for the hills and look to cover risk exposure.

The Aussie is seen as a ‘high beta’ currency that benefits from robust risk appetite and a positive global growth outlook but suffers when these conditions are reversed.

The Japanese Yen is often viewed by markets as the opposite of AUD and sometimes displays the characteristics of a defensive currency in times of uncertainty.

This has not been the case of late with the Bank of Japan (BoJ) maintaining extremely loose monetary policy.

There is speculation that the BoJ might physically intervene in the currency market if USD/JPY continues to run toward the October 2022 peak of 151.95 when the central bank sold US Dollars and bought Yen.

Such a circumstance could see AUD/JPY come under pressure which might assist Australia’s energy exporters in getting a bump up on their bottom line. Japan is the largest importer of Australian coal and liquified natural gas (LNG).

Australia is already running a record trade surplus each month and a low exchange rate, in both AUD/USD and AUD/JPY, continues to support the domestic economy.

To compound the good news for Aussie miners is the thawing of the previously frosty relationship with China.

Australian Prime Minister Anthony Albanese will be visiting the Middle Kingdom this week and there have been some early indications of both sides looking to improve their ties.

For the Aussie Dollar, the impending week might see retail sales, building approvals and the trade balance domestically.

However, the Federal Reserve will make its monetary policy decision on Wednesday and the bigger picture might be the motivating factor for Aussie Dollar moves until the RBA steps into the spotlight on Melbourne Cup Day, Tuesday, November 7th.

AUD/USD TECHNICAL ANALYSIS

Bullish and bearish technical indicators in AUD/USD might be about to come to a head.

The bearish TMA momentum indicator remains intact along with the descending trend channel.

A bearish triple moving average (TMA) formation requires the price to be below the short-term Simple Moving Average (SMA), the latter to be below the medium-term SMA and the medium-term SMA to be below the long-term SMA. All SMAs also need to have a negative gradient.

When looking at any combination of the 10-, 21-, 55- 100- and 200-day SMAs, the criteria for a bearish TMA have been met.

To learn more about tend trading, click on the banner below.

The low on Thursday was unable to penetrate below the low of November 2022 near 0.6270 and the descending trend line has been tested several times, but the market has been unable to sink below it.

The inability to meaningfully stretch lower could embolden the bulls with a potential base building.

Resistance might be at a cluster of prior peaks in the 0.6500 – 0.6510 area. Further up, the 0.6600 – 0.6620 area might be another resistance zone with several breakpoints and previous highs there.

On the downside, support may lie near the previous lows of 0.6285, 0.6270 and 0.6170.

The latter might also be supported at 161.8% Fibonacci Extension level at 0.6186.

AUD/USD DAILY CHART

Chart created in TradingView

AUD/JPY TECHNICAL ANALYSIS UPDATE

AUD/JPY remains range bound but that might present opportunities. To learn more about range trading, click on the banner below.

The price has mostly traded between 93.00 and 97.00 for four months. Resistance may remain at the prior peak and breakpoints in the 95.85 – 96.05 area ahead of potential resistance in the 96.80 – 97.00 area.

On the downside, nearby support could be near the breakpoint of 93.59 ahead of a series of prior lows and breakpoints in the 92.80 – 93.00 possible support zone.

Further down, support may lie at breakpoints of 92.30 and 92.44 ahead of the 50% Fibonacci Retracement level at 91.85 which is near the July low of 91.80.

Support might also be at 61.8% Fibonacci Retracement level at 90.50.

Chart created in TradingView

— Written by Daniel McCarthy, Strategist for DailyFX.com

Please contact Daniel via @DanMcCarthyFX on Twitter