audusd further potential downside as rba q1 gdp looms 1853102017

*Note: The medium-term technical analysis outlook section that had been published earlier on Friday, 02 June 2016 (before U.S. Nonfarm payrolls data for May) was updated to take into account of the bullish break of the former 0.7423 pivotal resistance.

Next week, we will have two major economic events for Australia; RBA (Australian central bank) monetary policy meeting outcome on Tues, 06 June at 0430 GMT follow by Q1 2017 GDP on Wed, 07 Jun at 0130 GMT.

In the last monetary policy meeting, RBA had left its policy cash rate at a record low of 1.5% since August 2016 as expected. In its accompanying monetary policy statement, RBA had turned more optimistic on the labour market after a better than expected employment report for April that rounded off seven consecutive months of increases.

For the upcoming meeting on Tues, 06 June, the ASX 30 day interbank cash rate future has priced in a 98% probability that the policy cash rate will remain at 1.5% and only a 2% chance of a rate cut by 25 basis points as at 31 May 2017 futures pricing data.

Also, the household debt to income ratio is at a record high which makes RBA reluctant to cut rate further at this juncture just to boast growth in the near-term that will lead to a further rise in household borrowings and also increases the risk of creating a housing bubble. Therefore, we are expecting RBA to remain status quo and keep its policy cash rate unchanged at 1.5%.

The accompanying monetary policy statement will be the key driver that can influence the movement of the AUD at least in the short to medium-term. There are several risk factors that can cause the RBA to strike a cautionary tone on the future economic outlook as follow:

• Lacklustre household consumption growth. Despite the better than expected 1% m/m rise in retail sales recorded in April from a -0.3% m/m in March, the y/y growth has remained unchanged at 2.7% which is still stuck in downward trajectory for six consecutive months since October 2016 ‘s growth rate of 3.3% y/y.
• The latest consumer confidence data for May had recorded a decline from 98 in April to 97.99 which lead it to see three consecutive months of decline since February 2017. This slowdown in Australian’s consumer confidence is in line with lacklustre wage growth.
• The recent deleveraging central government policies in China (a key trading partner with Australia) had started to take effect on manufacturing growth. The latest Caixin manufacturing PMI for May came in below expectation and fell to 49.6 (a level below 50 indicates contraction) from 50.3 in April. It was the first drop on manufacturing activity since June 2016. A warning sign that there will be less demand for Australia’s industrial metals such as iron ore as China’s manufacturing activities enter a “slowdown phase” that can hurt Australian exports.

Therefore, if such risk factors are being highlighted in the monetary policy statement, it can reinforce the on-going downside movement seen in the AUD/USD seen since 25 May 2017. In addition, we may also see a slowdown in Q1 GDP q/q growth from a 1.1% q/q growth recorded in Q4 2016 due to the risk factors highlighted above that can caused a drag on consumption and net trade. 

Medium-term technical outlook on AUD/USD (Update)

(Click to enlarge charts)

Key technical elements

• The AUD/USD has continued to evolve within a long-term bearish descending channel in place since July 2011 high. The recent 1.5 year-long of choppy sideways movement in place since the January 2016 low of 0.6827 is now being capped by the median line of the aforementioned long-term descending channel now acting as a resistance at 0.7550 (see weekly chart).
• On the shorter-term since the 0.7330 swing low area of 09 May 2017, the pair has continued to evolve within an ascending channel with its upper boundary now at 0.7560 and lower boundary at 0.7375 (see 4 hour chart)
• The 4 hour RSI oscillator has staged a bullish breakout from its resistance and still has potential room to manoeuvre to the upside before it reaches an extreme overbought level of 82% that has coincided with the recent medium-term swing high area of 0.7750 see on 21 March 2017. These observations suggest that short-term momentum of price action remains intact which can support of further potential push up in price action (see 4 hour chart).
• The key significant medium-term resistance now rest at 0.7750/60 which is defined by a confluence of elements. Firstly, the median line of the long-term descending channel in place since July 2011 high. Secondly, the upper boundary of a short-term ascending range channel in place since 09 May 2017 low. Thirdly, a Fibonacci cluster (1.00 projection of the up move from 09 May 2017 low to 23 May 2017 high, projected from 01 Jun 2017 low & the 50% retracement of the multi-month decline from 21 Mar 2017 high to 09 May 2017 low).

Key levels (1 to 3 weeks)

Intermediate resistance: 0.7516

Pivot (key resistance): 0.7550/60

Supports: 0.7375 (downside trigger), 0.7330 & 0.7280/60

Next resistances: 0.7740/50

Conclusion

In the shorter-term (1 to 3 days), the AUD/USD may see a further push  up to retest the recent minor swing high area of 0.7516 printed on 23/25 May 2017 with a maximum limit set at the 0.7550/60 updated medium-term pivotal resistance.

Thereafter, based on the Elliot Wave Principal/fractal analysis, a potential downside mean reversion movement is likely to occur for the pair to seek a retest on 0.7375 (lower boundary of the short-term ascending range channel). Only a break below 0.7375 may open up scope and increase the conviction to see a medium-term (1 to 3 weeks) bearish impulsive down leg to retest 0.7330 before targeting the 0.7280/60 support.

On the other hand, a clearance above 0.7550/60 is likely to see a further squeeze up towards a longer-term significant resistance at 0.7440/50 (the range top that has capped all the up moves since mid-April 2016).

Charts are from eSignal

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