The rumours about a cash rate cut, spread by the RBA, hold the AUD/USD bulls back
If a currency is rising on the good news and falling on the bad, it often means that the bulls want to go ahead but aren’t that confident. They search for long entries, looking at the improving foreign environment. However, once something negative is reported, the new longs are immediately exited. Something like this is happening to the Australian dollar. Strong data on Australian labour market pushed the AUD/USD up above the bottom of figure 72; however, Westpac forecast that the Reserve Bank should cut the cash rate by 25 bps in August and in November, encouraged the buyers to sell the Aussie.
It should be admitted that the foreign environment for the AUD has much improved in 2019. First, the Fed made a long pause in hiking the interest rate, thus limiting the potential of borrowing cost increase. Second, easing of the US-China trade battle suggests a gradual economic stabilization of Australia’s key trade partner. Finally, the iron ore price has reached its high since March, 2017. Based on the commodity market situation, the AUD looks to be undervalued.
Dynamics of AUD/USD and Iron Ore
Source: Trading Economic
There are more and more talks in Forex that China should settle down the trade conflict by buying more U.S. products. In addition, to avoid a further decline in China’s GDP growth, official Beijing will resort to the additional fiscal and monetary stimulus. Furthermore, China, urged by the USA, will avoid the yuan strengthening. The stable yuan, together with the PBOC, is a very good news bit for the AUD/USD bulls.
Dynamics of Chinese Yuan and Australian Dollar
Source: Trading Economics
Don’t forget about higher global risk appetite and a drop in Forex volatility down to the lowest level since 2014. These factors lure investors back to carry trades and increase the demand for income assets.
The Reserve Bank perfectly sees that the foreign environment is growing favorable for the AUD/USD bulls; however, the downtrend reversal may press down Australia’s inflation rate, followed by the export and GDP rate. In this context, it would be good to support the bears by signals about a possible cut in the cash rate, which, in fact, don’t seem to be real. Based on the record household debts and a drop in housing prices, they don’;t have to cut the interest rate. They could just tighten the rules of making loans.
In my opinion, the RBA is fueling the situation deliberately, in order to set the AUD growth back. However, in January, full-time employment added 65,400 of new jobs, the unemployment rate didn’t rise above 5%. and the inflation rate is close to 2%; so, the RBA can afford to retain the current cash rate, following by its hike if the economic situation improves. This fact allows me to recommend the AUD/USD purchases on the rate fall towards 0.703 and 0.7.
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Price chart of AUDUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.