Australian Dollar Resilience Undermined by Break of Bullish RSI Trend

Australian Dollar Talking Points

The Australian Dollar continued to outperform its US counterpart in June as AUD/USD climbed to a fresh yearly high (0.7064), but it remains to be seen if the resilience will carry into July as the Relative Strength Index (RSI) snaps the bullish trend from earlier this year.

Australian Dollar Resilience Undermined by Break of Bullish RSI Trend

AUD/USDretains the advance from the June low (0.6648) even though Reserve Bank of Australia (RBA) Governor Philip Lowe jawbones the Australian Dollar as the central bank continues to tame speculation for additional monetary support.

A recent speech by RBA Deputy GovernorGuy Debelle suggests the central bank will carry out a wait-and-see approach throughout the second half of 2020 as “the Australian economy has turned out to be somewhat better in the June quarter than feared.

Debelle emphasized that “the Board expects that the cash rate will remain at its current low level for some years,” but went onto say that “if the three-year bond yield target is credible to the market, then the Reserve Bank does not need to purchase many bonds at all to achieve the target.

Image of RBA balance sheet

In turn, Debelle revealed that “the RBA has not needed to buy any bonds since early May,” and the central bank may gradually adjust the forward guidance over the coming months as “recent data indicate that the outcomes in the Australian economy have been better than earlier feared.

Nevertheless, Debelle warns that the COVID-19 pandemic “will have a long-lived impact that will require considerable policy support for quite some time to come,” and it seems as though the RBA will rely on fiscal authorities to further support the economy as “the objective of the monetary policy response is to support the economy by keeping borrowing costs low and credit available for households and businesses, complementing the necessary and large fiscal policy stimulus.

As a result, RBA board member Ian Harper insists that fiscal authorities should set up a “tapering arrangement” as programs like the Jobkeeper Paymentis set to expire on September 27, but the government may continue to show little interest in extending the stimulus programs as Standard and Poor’s and Fitch Ratings cut Australia’s credit rating outlook to ‘negative’ from ‘stable.’

With that said, the RBA may come under pressure to deploy more unconventional tools as the official cash rate sits at the effective lower bound (ELB), but the central bank looks poised to retain the status quo at the next interest rate decision on July 7as officials vow to “not increase the cash rate target until progress is made towards full employment.”

At the same time, a growing number of RBA officials may attempt to jawbone the local currency as Governor Lowe insists that a lower Australian Dollar would help to lift inflation, but the resilience in AUD/USD may persist in July if the central bank continues to tame speculation for additional monetary support.

However, recent developments in the Relative Strength Index (RSI) warn of a potential shift inAUD/USD behavior as the indicator falls back from overbought territory and snaps the bullish trend from earlier this year.

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AUD/USD Rate Daily Chart

Image of AUD/USD rate daily chart

Source: Trading View

  • Keep in mind, the monthly opening range was a key dynamic for AUD/USD in the fourth quarter of 2019 as the exchange rate carved a major low on October 2, with the high for November occurring during the first full week of the month, while the low for December materialized on the first day of the month.
  • The opening range for 2020 showed a similar scenario as AUD/USD marked the high of the month on January 2, with the exchange rate carving the February high during the first week of the month.
  • However, the opening range for March was less relevant, with the high of the month occurring on the 9th, the same day as the flash crash.
  • Nevertheless, the advance from the yearly low (0.5506) gathered pace as AUD/USD broke out of the April range, with the exchange rate clearing the February high (0.6774) as the Relative Strength Index (RSI) pushed into overbought territory.
  • AUD/USD appears to be stuck in a narrow range after trading to a fresh 2020 high (0.7064) in June, but the failed attempt to of the July 2019 high (0.7082) may lead to a near-term correction in the exchange rate as the RSI snaps the bullish trend from earlier this year.
  • Lack of momentum to push back above the 0.6970 (23.6% expansion) to 0.6980 (23.6% expansion) region keeps the Fibonacci overlap around 0.6720 (78.6% expansion) to 0.6800 (61.8% expansion) on the radar as AUD/USD consolidates within the June range.
  • Need a break/close below Fibonacci overlap around 0.6720 (78.6% expansion) to 0.6800 (61.8% expansion) to open the downside targets, with the first area of interest coming in around 0.6600 (50% expansion) to 0.6650 (61.8% expansion), which largely lines up with the June low (0.66480).
  • Next area of interest comes in around 0.6520 (38.2% expansion) 0.6540 (78.6% expansion) followed by the overlap around 0.6380 (50% expansion) to 0.6450 (38.2% expansion).

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— Written by David Song, Currency Strategist

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