AUDUSD minor uptrend intact ahead of RBA

The Australian central bank, RBA will release its monetary policy decision tomorrow, 05 Feb at 0330 GMT. The consensus’s view is an expectation for RBA to maintain its key cash rate at 1.5%, a record low since late 2016, that’s more that two years of policy inaction. Interestingly, a prominent RBA Board member, Ian Harper made a hawkish remark last week where he had a personal view that the next move for the cash rate is likely to be higher and cited the strong labour market for the main reason. Harper’s optimistic outlook is in line with similar public statements from the RBA in late 2018.

However, there are several headwinds that can alter RBA’s rosy economic outlook in the second half of 2019;

• The downturn seen in the domestic housing market is still not showing any clear signs of abating where house prices (seasonally adjusted) has continued to decline by 0.8% m/m in Jan 2019 from a 1.0% m/m fall recorded in Dec 2018.
• The weak housing market has led to a decline in building permits where it declined by 8.4% m/m in Dec 2018 versus an expectation of 1.8% m/m increase. Dec’s decline marked the 3rd consecutive month of contraction since Oct 2018.
• A lacklustre housing market has dampened consumer confidence where the Melbourne Institute and Westpac Bank Consumer Sentiment Index has declined by 4.7% m/m to 99.6 in Jan 2019, the lowest reading since Sep 2017. A further deterioration in consumer confidence is likely to be translated into a weaker retail sales data which has been robust since Aug 2018.
• Slower economic growth from China where the Caixin manufacturing PMI data had indicated a contraction for two consecutive months since Dec 2019. Therefore, it will keep price pressures from rising where the annualised inflation rate is likely to be capped below RBA’s target of 2% to 3% range.   

For analysing expected movement in currencies (especially in the short to medium-term), we cannot look at the state of the domestic Australian economy in isolation and need to take into consideration the sentiment and monetary policy’s expectation of the variable currency in play which is the USD.

Last week’ Fed FOMC has altered its previous hawkish stance from two expected interest rate hikes in 2019 as per highlighted earlier in the Dec 2018 “Dot Plot” for a dovish reversal. It has advocated “patience” in hiking rates and leave the door open for a possible interest cut if the global economy slows down further. Also, it has indicated that the on-going quantitative tightening/balance sheet roll over programme on its Treasuries and mortgage backed securities may end sooner.

A sudden “U-turn” policy stance from the Fed has led to unwinding of late USD long positions and created a short-term positive feedback loop into the AUD/USD pair that took precedence over a weakening domestic economic condition in Australia. Now, let’s us look at the AUD/USD from a technical analysis perspective.

click to enlarge charts

Key elements

• Since its 03 Jan 2019 “flash crash” low of 0.6738, the AUD/USD had staged a push up by 8% (around 556 pips) that propelled it to become the top four major developed currencies that outperformed against the USD till to date, together with the GBP, CAD and NZD.
• The minor uptrend in place since 03 Jan 2019 low remains intact with momentum indicators that remain positive at this juncture. The daily RSI has continued to inch upwards from its former significant resistance now turns pull-back support at the 55 level. Also, the daily RSI still has further room to manoeuvre to the upside before it reaches an extreme overbought level at 80. In addition, the shorter-term (4-hour) Stochastic oscillator has dipped back down to an extreme oversold region.
• The key short-term support rests at 0.7200 which is defined by pull-back support of the former minor range resistance from 13 Dec 2018/11 Jan 2019 and the former minor swing high area of 28 Jan 2019.
• The next significant near-term resistances stand at 0.7380 (the swing high area of 03 Dec 2018) and 0.7450 (range resistance from 07 May/07 Aug 2018 & a Fibonacci retracement/expansion cluster; 50% retracement of the entire down move from 26 Jan 2018 high & 0.764 expansion from 03 Jan 2019 low).

Key Levels (1 to 3 weeks)

Pivot (key resistance): 0.7200

Resistances: 0.7295, 0.7380 & 0.7450

Next support: 0.7080/7060

Conclusion

The minor uptrend in place since 03 Jan 2019 low of 0.6738 remains intact for the AUD/USD. If it manages to hold at the 0.7200 key medium-term pivotal support, the pair is likely to see a further potential push up to retest the recent minor swing high of 0.7295 before targeting the next resistance at 0.7380. A break above 0.7380 opens up scope for a further potential corrective rebound to target the next resistance at 0.7450 within a longer term bearish impulsive down move phase.

On the other hand, failure to hold at 0.7200 invalidates the bullish scenario for a choppy slide towards the next near-term support at 0.7080/7060

Charts are from eSignal