AUD/USD's Indecisiveness Could Lead to a Sharp Move
A surprising decision by the Reserve Bank of Australia to cut interest
rates and a more hawkish-than-expected Federal Reserve meeting minutes
has weighed heavily on the AUD/USD in recent times. The commodity
currency has come under further pressure from renewed concerns about
Australia’s largest trading partner, China. Incoming data from the
world’s second largest economy over the past couple of weeks have been
poor, raising concerns about the level of demand for Australia’s key
commodity exports such as Iron ore. Other base and precious metals have
also weakened with copper, gold and silver all retreating. As well as
Chinese demand concerns, these buck-denominated metals have been
pressurised by a rallying US dollar.
But most of these developments are probably priced in now. Apart from a
couple of speeches from the Reserve Bank of Australia official this
week, there is not much in the way of key Australian data this week,
although with a couple of exceptions. The RBA’s Governor Glenn Stevens
is due to speak at the Trans-Tasman Business Circle briefing, in Sydney
on Tuesday, while Assistant Governor Guy Debelle will be speaking in New
York on Thursday. In terms of data, the Australian Bureau of Statistics
will release the quarterly construction work report on Wednesday,
followed by the private capital expenditure data on Thursday. From the
US, this week’s key data include durable goods orders, unemployment
claims and pending home sales, all due on Thursday, followed by
preliminary second quarter GDP on Friday. Today’s data showed the
manufacturing PMI in May eased to its lowest level since 2009. At 50.5,
it was barely above the expansion threshold of 50, raising question
marks about the prospects of a June rate hike.
Technical outlook
From a technical point of view, the AUD/USD formed a couple of doji
candles in as many days at the end of last week following an aggressive
move to the downside on Wednesday in the aftermath of the hawkish Fed
minutes. The Aussie was displaying another such candlestick formation at
the time of this writing. The doji formations point to indecision and
suggests no one is quite sure what the short-term trend is.
Clearly, price will soon make its next move depending on where the
marginal increase in the pressure will come from: the buyers or the
sellers. Given the recent sharp drop, and with price trading around the
200-day moving average and the 61.8% Fibonacci retracement against the
most recent rally, there is a good chance that we may see some
short-side profit-taking here. This alone could provide some relief for
the Aussie, potentially leading to a bounce. That’s assuming that the
bounce has not already come to pass today. The alternative scenario is
even more compelling. If price fails to bounce from such an important
support area, then surely it will need to go down a lot further before
it becomes attractive once again for the buyers to step back in.
So, a sharp move in one or the other direction looks imminent.
Conservative traders may therefore wish to keep this pair in their watch
lists for now and wait for price to either break below last week’s low
at around 0.7175 or move above the key short-term resistance and the
flattening 200-day moving average around the 0.7250/5 area. In the
bullish scenario, the next logical levels to watch for potential
resistance are the prior hurdles at 0.7325 followed by 0.7380. In the
bearish scenario, there are not many prior reference points until
0.6900, so the 78.6% Fibonacci retracement at 0.7045/50 could be a
realistic short-term target.