Sat, Apr 01, 2023 @ 03:45 GMT
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Currency Pair of the Week: AUD/USD

The Reserve Bank of Australia meets on Tuesday this week at its February Interest Rate Decision meeting.  Prior to the most recent release of the CPI data, expectations were for the RBA to only hike 15bps to bring the key rate to 3.25%.  However, after the release of the inflation data on January 24th, expectations jumped to a hike of 25bps for the upcoming meeting.  The Q4 inflation reading was 7.8% vs an expectation of 7.5% and a previous reading of 7.3%.  In addition, the monthly CPI Indicator for December jumped to 8.4% YoY vs an expectation of only 7.6% YoY and a previous reading of 7.3% YoY.  This would indicate that not only was inflation strong in Q4 in Australia, but it got stronger as the quarter progressed. In addition, the RBA’s Trimmed Mean CPI, which is the RBAs favorite measure of inflation, increased to 6.9% YoY vs an expectation of only 6.5% YoY and a prior reading of 6.1% YoY.  At the prior meeting, there was talk of a 50bps rate hike, then a pause.  However, the Committee ultimately went with the 25bps rate hike.  Could the RBA hike an additional 25bps, then signal a pause?  Or is inflation still rising to quickly?  Will the Committee take a hawkish stance?  Aussie is sure to move despite the outcome.

The US released Non-Farm Payrolls on Friday after the FOMC meeting earlier in the week.  The central bank meeting was taken as a bit more dovish by the markets, as Fed Chairman Powell said that he can now say that disinflationary process has started.  In addition, he circumvented questioning about a possible pause in the rate cycle before hiking again.  However, the statement repeated that Fed hikes are “ongoing”. This led markets to believe that whatever amount the Fed hikes rates moving forward will be reversed in Q4 of this year.  But that all changed on Friday when the US released January Non-Farm Payrolls.  The headline print (which included seasonal adjustments and benchmark revisions) jumped to 517,000 vs an expectation of only 185,000 and a higher revised December reading of 260,000.  In addition, the Unemployment Rate fell to 3.4% from 3.5%.  This is the lowest unemployment rate since 1969! The strong jobs data caused the US Dollar and yields to spike as many now see more of a possibility of a March rate hike of 25bps.  Fed Chairman Powell will speak on Tuesday at the Economic Club in Washington.  Watch for comments that clarify anything the markets may have misinterpreted.

AUD/USD had been moving lower in any orderly channel since making 2022 highs in early April at 0.7661.  The pair made a 2022 low on October 13th, and bounced higher out of the channel on November 30th.  Since then, AUD/USD has continued higher.  However, the price move stalled near previous highs dating to August 11th, 2022, and the 61.8% Fibonacci retracement level from the highs of 2022 to the lows of 2022, near 0.7092/0.7137.  On Friday, after the payroll data, price broke lower out of an ascending wedge and is currently testing horizontal support and the 50 Day Moving Average near 0.6884.

Source: Tradingview, Stone X

If price continues to move below current support levels near 0.6860, which includes horizontal support, the 61.8% Fibonacci retracement from the January 3rd lows to the February 2nd highs, and the 50 Day Moving Average (see daily), the next support is at the 200 Day Moving Average at 0.6808.  Below there, price can fall to the January 3rd lows at 0.6688.  However, notice that the RSI is in oversold territory, a possibility that AUD/USD may be due for a correction.  If price bounces, the first resistance is at the lows of January 31st at 0.6984, then the bottom trendline of the wedge near 0.7067.  Above there, price can move to the February 2nd highs at 0.7156.

Source: Tradingview, Stone X

With Powell speaking on Tuesday, watch for him to clarify anything that may have been misinterpreted by the markets from the FOMC meeting or the NFP data from last week.  In addition, the RBA may be more hawkish than expected on Tuesday with the much higher inflation data recently.  This could be a volatile week for AUD/USD.
DISCLAIMER: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase of sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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