Australian Dollar Forecast: The RBA is Under Starters Orders
04 Nov 2023 01:00, GMTAustralian Dollar Forecast: Bullish
- The Australian Dollar found some legs on a soft USD
- Treasury yields tanked last week, underpinning risk assets
- The RBA appears poised for a rate hike on Tuesday. Higher AUD/USD?
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The Australian Dollar roared higher to close out the week with the US Dollar tanking on the dramatic collapse of Treasury yields across the curve.
After trading above 5.00% a fortnight ago, the benchmark 10-year note dipped under 4.50% on Friday.
AUD/USD traded above 65 cents on Friday for the first time since late September.
Domestically, the Reserve Bank of Australia (RBA) will be meeting to discuss monetary policy on Tuesday, the day of the Melbourne Cup, a horse race that captures global attention.
If recent commentary from RBA officials is to be believed, a hike seems most likely as telegraphed here more than 2 weeks ago.
RBA Governor Michele Bullock assumed the helm in September in the aftermath of a government review of the bank and has made it clear that more effective communication would be an objective on her watch.
The language from the October meeting minutes and comments from Assistant Governor Chris Kent and Ms Bullock has been decidedly hawkish. Here is a quick recap on the commentary prior to the crucial Q3 CPI data release –
“Some further tightening may be required to ensure that inflation, that is still too high, returns to target.”
“The Board has a low tolerance for a slower return of inflation to target than currently expected. Whether or not a further increase in interest rates is required would, therefore, depend on the incoming data and how these alter the economic outlook and the evolving assessment of risks.”
“The problem is we’ve had shock after shock after shock. The more that keeps inflation elevated, even if it’s from supply shocks, the more people adjust their thinking.”
“The more people adjust their inflation expectations, the more entrenched inflation is likely to become. So that’s the challenge.”
Then we had CPI printing above expectations. Most significant is that the quarter-on-quarter read for both the headline and trimmed mean measure reaccelerated through the third quarter. Click on this link for more CPI details.
Post-CPI at a Senate estimates hearing, Ms Bullock would not be drawn into stipulating that a rate hike would definitely happen as it was still being considered. Some in the market and media misinterpreted this as being dovish.
Treasurer Jim Chalmers also weighed into the tightening discussion and said that he did not believe that the latest CPI data necessitated a rate hike. A surprising comment given that he has previously said that the RBA’s independence should not be undermined.
Perhaps he couldn’t get a hold of former Prime Minister Paul Keating before making the comment. Mr Keating is highly regarded in many quarters for his understanding of macroeconomics, although he has been a controversial figure at times.
In any case, the labour market remains tight, inflation is getting a head of steam and housing prices are on the gallop. The RBA’s current stance is less restrictive than in many other similar jurisdictions that have less price pressures.
If the RBA does not hike at either the November or December meetings, then its inflation-fighting credentials will come under scrutiny.
The Aussie Dollar might get an initial clean run on an RBA hike, but it seems that the global picture will still impact the exchange over the medium and long term.
AUD/USD TECHNICAL ANALYSIS
The rally in AUD/USD roared higher last week as it raced above the short and medium-term 10-, 21-, 34- and 55-day Simple Moving Averages (SMA), possibly suggesting that near-term momentum is bullish for now.
The 100- and 200-day SMAs remain above the price, and both coincide with notable potential resistance zones near 0.6520 and 0.6620.
On the downside, support may lie near a breakpoint at 0.6450 or the previous lows of 0.6285, 0.6270 and 0.6170. The latter might also be supported at 161.8% Fibonacci Extension level at 0.6186.
In the bigger picture though, it remains in a descending trend channel and the longer-term bearish trend might be intact for now.
AUD/USD DAILY CHART
AUD/JPY TECHNICAL ANALYSIS UPDATE
AUD/JPY made a 4-month high on Friday, breaking out of the recent range and trading outside the upper band of the 21-day Simple Moving Average (SMA) based Bollinger Band.
A close back inside the band might signal a pause in the bullish run or a potential reversal as unfolded in June this year. It should be noted though that past performance is not indicative of future results.
AUD/JPY traders should also be wary of potential FX intervention by the Bank of Japan (BoJ) as it seeks to stem sudden Yen weakness.
Resistance might be around the prior peaks of 97.70 and 98.70.
On the downside, nearby support could be near the breakpoints of 96.80, 96.00 and 95.80.
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--- Written by Daniel McCarthy, Strategist for DailyFX.com
Please contact Daniel via @DanMcCarthyFX on Twitter
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.