The Reserve Bank of Australia meets this week and is expected to leave rates unchanged at all-time lows of 0.10% and reiterate the monetary policy will remain accommodative until CPI is sustainable at their targeted level of 2%-3%. At their February meeting, the RBA said that they expected that time will come in 2024! However, RBA governor Lowe will likely have to address the recent rise in yields and the central banks intervention. Last week, rates in the Australian 10-year bond rose 45bps! As a result of the increase in bond yields, the RBA had to step up its buying of 3-year bonds. They bought an estimated A$3 billion on Thursday and A$1 billion in Wednesday (and rates still went higher). Today, the RBA announced they were buying A$4 billion of longer-dated bonds, double the usual size! New coronavirus cases have continued to drop in the country, with sporting event capacities increasing to 50% and some dance clubs reopening. Vaccines distribution is starting. With life in Australia moving back towards normal, is there a chance the RBA will have to raise rates sooner than expected? Comments from central bank this week will be closely monitored.
Federal Reserve Chairman Jerome Powell gave his semi-annual testimony to Congress on Monetary Policy. He noted that current inflation expectations were transitory and that the recent rise in yields was unsustainable. He also said that the Fed will keep monetary policy in place until inflation is above the Fed’s target of 2%-3% for some time, and until maximum employment is achieved. Yields in the US 10-year Treasury bond rose last week with a disappointing 7-year auction on Thursday. However, they have drifted lower off the highs from near 1.60% to 1.44% as of the time of this writing. Powell is set to speak on Thursday on the US economy at the WSJ Jobs Summit. His comments will be closely monitored to see if he addresses the recent rise in yields and if the Fed will adjust monetary policy. The US stimulus package passed in the House of Representatives on Friday evening, and now will head to the Senate. In addition, although concerns are moving to the forefront regarding the coronavirus variants in the US, Johnson and Johnson’s vaccine was approved for emergency use in the US and is now the 3rd vaccine available. According to Bloomberg’s vaccine tracker, 75.2 million doses have been given in the US, roughly 22% of the population. If things return to normal at a faster pace than the Fed expects, it may put the Fed in a bind as inflation expectations and interest rates will rise, pushing the US Dollar lower!
AUD/USD had been in an orderly trend higher since early November 2020, then paused in January, forming a flag pattern. The pair broke higher on February 9th and was advancing nicely, on its way towards its flag target near 0.8400. However, on Thursday last week a confluence of resistance halted the move. First, the pair reached the phycological round number resistance at 0.8000. It also reached the 161.8% Fibonacci extension from the highs of January 6th to the lows of February 2nd, near 0.7960. Finally, price reached a higher high as the RSI made a lower high, in overbought conditions, which is a sign of a reversal may be near. As a result, price did reverse, forming a bearish engulfing pattern on the daily timeframe. Price continued lower aggressively lower on Friday as stops were taken out below horizonal support below 0.7820.
Source: Tradingview, FOREX.com
On a 240-minute timeframe, AUD/USD is holding the 61.8% Fibonacci retracement and horizontal support near 0.7733. Below there, price can fall back to February 2nd lows near 0.7561. Further horizontal support is near the December 21st, 2020 lows near 0.7459. Short-term horizontal resistance doesn’t cross until near 0.7900, then the highs from Thursday near 0.8010.
Source: Tradingview, FOREX.com
Direction of AUD/USD is going to depend on comments from central banks regarding the recent spike in yields. The RBA meeting and comments for Fed Chairman Powell (and other Fed speakers this week) will be closely monitored for clues to any kind of adjustment to monetary policy. In addition, if AUD/USD breaks near term support at today’s lows (actual low is 0.7692), price may continue lower.