Why 0.80 Could be the Limit for AUD to USD Rate

Why 0.80 Could be the Limit for AUD to USD Rate

20 April 2016, 18:49
Vasilii Apostolidi
The Australian dollar’s impressive rally continues apace, but is the currency now overbought and could the RBA try and quash further gains?
The Australian to US dollar exchange rate (AUDUSD) is now at a 10 month high with key resistance seen ahead at the June 2015 high of 0.7849 followed by 0.7990.

The AUDUSD continues to trend higher after turning up from the channel base on Monday, a move that been aided by a sharp move higher in global commodity prices.

"We understand china is preparing to ramp up its next phase of city infrastructure projects including a number of MTRs (Mass Transport Systems)," say SP Angel, a brokerage in London.

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SP Angel cite comments made by the head of the Ministry of Commerce People's Republic of China as being indicative that China will have enormous demand for steel for their next stage of city infrastructure.

The implication is that China will have enormous demand for steel, copper and other metals, all of which would benefit Australian raw material exporters of which iron and copper are key.

AUD/USD is now at levels that form the rising channel’s top but there are no real indicators that the this is a limit as the RBA defers concerns on currency strength for now. Select chart here.

“We turn slightly bullish on AUD against USD as market risk appetite continues to hold firm, but warn that it is very prone to renewed weakness in oil prices,” says an analysis note from Hong Leong Bank, an echo to the views held on the currency pair by a number of market participants.  

 AUD/USD has posted a bullish outside day and is now making higher highs for the trend.

“The double bottom has a target of 0.7875 while the channel top comes in at 0.7990,” say CitiFX who see the pair heading to levels that could prompt the RBA to express displeasure with the currency’s strength.

We know that Reserve Bank of Australia Governor (RBA) Glenn Stevens is already unhappy with the currency’s appreciation.

Stevens recently noted:

“Unless you think that the commodity price trend now is different and we are heading back to a world of considerably higher prices for an extended period, and you think the Fed is never going to lift rates, it is not clear that that situation will warrant a much higher exchange rate than this and there is some risk actually that the currency might be getting a bit ahead of itself”.

The minutes to the RBA’s April policy meeting showed the recent appreciation of Aussie could complicate the rebalancing of the economy.

The services export sector could be particularly impacted by the move.

For that reason the RBA stated that monetary policy will remain highly accommodative, but in fact that simply means that the central bank will remain stationary for the time being.

There were no hints that the central bank would consider cutting rates any further given the generally robust labour market conditions and the stabilisation of Chinese economy.

“aA number of more medium term resistance levels are in the 0.81-0.82 area though the unit risks running up against stronger RBA jawboning at that level,” warn Citi.

There are others who see 0.80 as a possible level that would invite RBA scrutiny:

“We suspect that the RBA will grudgingly accept a rise in the Aussie up to the 80 cent level, but if the pair begins to move much higher than that the central bank will become much more aggressive in its efforts to lower the exchange rate,” says Boris Schlossberg at BK Asset Management.

Is the Australian Dollar Overbought?

The RBA is one potential barrier to the Aussie’s ascent.

Another potential block would be fatigue.

“Technically, AUDUSD remains overbought in our view and we caution that rejection is imminent, with scope to drop  to  0.7726 before moving lower to 0.7663,” say analysts at Hong Leong Bank.

If we are to take a strictly technical approach to the question of whether the Australian dollar is overbought then it must be pointed out that the AUD/USD’s Relative Strength Index on the daily charts is still below the 70 threshold.

A reading of 70 and above indicates an overbought product.

Data published in 2011 suggests the Relative Strength Index (RSI) is the most popular technical study used on the Bloomberg terminal, confirming this to be an incredibly useful tool.

The RSI is a momentum oscillator offering confirmation of price breakouts, short-term buy and sell signals, and longer-term, trend-ending implications from price and momentum divergences.

What we are getting from AUD/USD’s daily RSI is that the pair is in a bull market. While the pair may be overbought it does not necessarily mean a sharp decline is due. Indeed, a period of consolidation at these levels could get the RSI back below 70.

If anything, a period of consolidation would be the worst the markets are likely to throw at the Aussie in the absence of a major shift in global investor sentiment.

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