By Jameel Ahmad
For the past two months, a dovish speaking Reserve Bank of Australia (RBA) have been warning that the Australian economy is set to enter a period weaker than expected economic growth. Yet, for the past two months, investors have remained undeterred from these dovish remarks and continued to purchase the Australian currency. The third and perhaps most explicit threat yet occurred when RBA Governor Stevens announced on July 3rd that investors were underestimating a significant fall in the Australian currency. After experiencing initial selling, investors continued once again to purchase the Australian currency. So much for third time lucky.
The RBA’s next attempt to inspire AUDUSD selling is likely to occur when the latest RBA minutes are released. Fortunately for the RBA, this could be their chance to strike when the iron is hot.
Last Thursday, an element of confusion was created regarding Australia’s latest employment report. On announcement, it seemed that the Australian economy had added 16,000 jobs in June and as a result, the Aussie spiked to a weekly high, 0.9455. On reflection of the employment report, it emerged that full time employment accounted for only 3,800 of the job advancement, with part time vacancies leading the way. This is not encouraging for the Australian employment sector and sent the Aussie back down to a lowly 0.9360.
Tonight’s RBA minutes release will likely aim to send the Aussie lower by reiterating recent remarks that the AUDUSD is currently overvalued, alongside a further reminder that the Australian economy is set to enter a period of weak economic growth. There may even be a threat towards the possibility of future currency intervention if the AUDUSD continues to be traded at an elevated level. Another option for the RBA to encourage bearish AUDUSD movement is to hint that if the Australian economy refrains from transitioning away from mining reliance (accounted for 0.9% of Australia’s 1.1% recent GDP quarterly growth) and towards domestic consumption (recent soft retail sales figures have triggered concerns that consumer sentiment is low following proposed government spending cuts), a rate cut might be required at a later date.
In regards to the technicals on the Daily timeframe, the valuation of the AUDUSD has been supported by a bullish trend line since the beginning of the year. This trend line has acted as a dynamic support level on several occasions and was tested once again following last week’s employment release. If the trend line is going to break, now could be the opportune time following a weak job report.
My expectation is that the Australian Central Bank will use tonight’s RBA minutes releasetoagain add pressure on the AUDUSD. The pair will likely look to use the trend line once again as support. If the trend line does break, 0.9360 is another regularly touched support level. A potential break to the downside below this area would then likely find support around 0.9316. Any further movement would then likely be dependent on the market reaction to China’s GDP release on Wednesday morning (more on this tomorrow).
•Ahmad is chief market analyst at FXTM.