The Australian dollar traded down to a low of 0.7649 overnight before the overall weakness of the US dollar saw the buyers re-enter lifting the Aussie to 0.7680 as the market awaits what’s expected to be a reasonably upbeat RBA release this morning.
That release, the quarterly Statement on Monetary Policy is the big update on where the RBA sees Australia’s growth, trading partner growth, the overall global outlook and how that all fits back into the outlook for the local economy and monetary policy.
After Tuesday’s statement from Governor Lowe again reaffirmed the RBA’s ” central forecast is for GDP growth to pick up and to average around 3 percent over the next few years,” it is reasonable to expect a fairly upbeat document.
But to economists, traders, and the market how Australia gets to that growth rate – the composition of growth – is going to be important as well. And to that end, there will be a laser focus on what the RBA has to say about the outlook for domestic consumption and households.
As I noted earlier this week, after two poor retail sales reports since the October RBA board meeting and with a relatively weak CPI, I thought the RBA would take a dovish tilt on the outlook. In fact, the governor did no such thing and reaffirmed the solid growth outlook.
In the end all Governor Lowe said Tuesday in this regard was “one continuing source of uncertainty is the outlook for household consumption. Household incomes are growing slowly and debt levels are high”. Me and many others would like to see more information about how the RBA sees this situation evolving through time and the impact on domestic consumption and household spending.
And of course, what the RBA says about the Aussie dollar is going to be important as well.
On Tuesday Governor Lowe said “the Australian dollar has appreciated since mid-year, partly reflecting a lower US dollar. The higher exchange rate is expected to contribute to continued subdued price pressures in the economy. It is also weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast”.
But if I recall correctly the Aussie was around 80 cents and the TWI around 67.1 against levels of 0.76.80 and 65 today. That’s about 4.4% and 3.3% lower than where they were at the time. Perhaps this is some of where the incremental growth benefits come from even though the RBA is trying to restrain any further Aussie dollar appreciation with its language.
So it’s going to be a very important period for the Aussie at 11.30 this morning when the RBA releases its statement.
Will it be enough to break either side of the 0.7620/0.7730 range the Aussie is currently in? I doubt that. But after Tuesday if the RBA takes that dovish tilt I thought they might that would surprise the market.
Looking at the charts now and, as you’d expect it’s clear the Aussie is stuck in a range and it’s clear in the past days candle that traders aren’t sure which way to go. The Doji is neutral but suggests uncertainty in the outlook.
Clearly, the downtrend remains the dominant one.
But the daily price action reinforces to me both that the RBA is going to be very important. But so too is an eventual break of either side of this range. I’ll likely run with a breach of 0.7733 or 0.7620.
In other forex market developments, recently I have been highlighting that this is not a bull market for the US dollar both because it can’t break the important overhead technical leave in the DXY at 95.25 just yet and because it simply can’t hold onto gains once positive stimuli is assimilated. So it’s no surprise this morning that the dollar is down as traders worry about the ongoing internal debate in the GOP about the tax cuts. Indeed, while the House argues over its bill the focus seems to have shifted to the Senate’s own version of what tax reform will look like. Specifically, the delayed corporate cut – only by 1-year mind you – seems to be the sticking point.
As a result, the dollar is down, the Euro is backtested by the underside of breakdown wedge, and USDJPY is back down near 113. Clearly if the tax deal does get done then the dollar should turn around and these moves will be reversed. But it’s also worth noting that much has been baked into the USD cake it seems for some time. I’ve been rhetorically bullish the USD in a structural sense and over a medium to long-term time horizon for some time. I remain that way. But everything I read continues to suggest that many traders see policy divergence already baked into the cake with the risks that the ECB, and others, may need to exit faster than they think. So, they see the tax deal as the positive the USD needs. I agree with that and to get back to where I started – it seems the case that this is not a USD bull market because after any rally traders reappear to sell dollars once again. Until that changes any gains are going to be hard-fought.
USDJPY looks set to retrace toward the 38.2% level of this recent move after multiple failed attempts to break through the top of the medium-term range it has been trading in. I’m short on the basis of my system and the break of this little uptrend line.
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