audusd risk of a short term mean reversion decline as rba looms 1855192017

Next week, we will have RBA (Australian central bank) monetary policy meeting outcome on Tues, 04 July 2017 at 0430 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 has continued to strike an upbeat tone on Australian economic outlook, a continuation of its optimistic view from the previous May meeting. The labour market has remained resilient where the unemployment rate fell to a four-year low of 5.5% in May. This important an economic indicator to watch as RBA has hinted previously that a deterioration in the labour market could trigger another policy interest rate cut.

Despite a strong labour market in terms of headline jobs growth, wage growth has continued to be subdued where it recorded a record low growth rate of 1.9% annualised in Q1 2017, the same pace seen in the previous quarter, Q4 2016. We expect such slow wage growth rate to persist due to the following reasons:

• The recent increase in full-time jobs has not been accompanied by a drastic slowdown in the growth of underemployment as the share of the labour force which are underemployed only decrease to 8.8% in May from 8.9% seen in April.
• The underemployment rate has continued to be elevated which translates into only a slight improvement in the underutilisation rate (a broader measure of spare capacity) where it has declined only to 14.4% in May from 14.8% seen in February. This is still considered high in historical standards as before the Great Financial Crisis in 2008, it stood at around 10%.
• This excess spare capacity as reflected in the underutilisation rate should put a lid of wage growth.

Therefore, in a persistent low wage growth environment that is likely to prevent underlying inflation from soaring coupled with a record high level of household debt, we expect RBA to maintain status quo on its monetary policy stance and keep its key policy cash rate unchanged at 1.5%.

The AUD/USD has rallied by 6.2% since the start of 2017 that make it the third best performing major currencies against the USD (see chart below). However without any expected strong hawkish comments in the upcoming RBA’s monetary policy statement, the recent rally seen in the AUD/USD may find it hard to have a bullish breakout above the significant range resistance of 0.7710/7750.

Now, let’s us examine the AUD/USD from a technical analysis perspective.

Short-term technical outlook on AUD/USD

(Click to enlarge charts)

Key technical elements

• The on-going rally from 22 June 2017 low of 0.7532 has reached the lower limit of the significant range top/resistance at 0.7710 that has capped previous up move since April 2016 (see weekly chart) Click here for a recap for our previous “Chart of the day” report.
• The aforementioned significant range resistance of 0.7710/7750 also confluences with the upper boundary of a short-term ascending channel in place since 02 June 2017 and a Fibonacci projection cluster.
• Short-term momentum indicator, the 4 Hour Stochastic oscillator has just exited from its overbought region which suggests that the on-going steep rally from 22 June 2017 low has been overextended where it faces the risk of a mean reversion decline at this juncture (see 4 hour chart).
•  Based on the Elliot Wave Principal and fractal analysis, the price structure of the AUD/USD may have completed an intermediate degree five wave bullish impulsive structure from 09 May 2017 low of 0.7328 labelled as 1/, 2/, 3/, 4/ & 5/ with a potential 5^th wave end target at 0.7727 (0.618 Fibonacci projection). Therefore, it implies that the AUD/USD faces the risk of at least a short-term down move to retrace the on-going rally from 22 June 2017 low.
• The next significant short-term support rests at the 0.7622/7610 zone which is defined by the former minor swing high areas of 15 June/19 June/27 June 2017, the lower boundary of the short-term ascending channel from 02 June 2017 low and the 23.6% Fibonacci retracement of the medium-term up move from 09 May 2017 low (see 4 hour chart).

Key levels (1 to 3 days)

Intermediate resistance: 0.7710

Pivot (key resistance): 0.7750

Supports: 0.7670 (downside trigger) & 0.7622/7610

Next resistance: 0.7900

Conclusion

After its recent steep rally seen from 22 June 2016 low of 0.7532, the AUD/USD now faces the risk of short-term mean reversion decline. As long as the 0.7750 pivotal resistance is not surpassed and a break below 0.7670, the AUD/USD is likely to see a decline towards the near-term support zone of 0.7622/10.

However, a clearance above 0.7750 is likely to invalidate the preferred short-term mean reversion decline scenario to open up scope for an extension of the on-going bullish impulsive upleg to target the 0.7900 key long-term resistance (the pull-back resistance of the former ascending trendline from April 2001 low).

Charts are from eSignal

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