Australian Dollar Talking Points
AUD/USD trades to a fresh monthly high (0.6559) following the Federal Reserve interest rate decision, and the exchange rate faces a key test going into May as it approaches the March high (0.6685).
AUD/USD Rate Eyes March High as FOMC Sticks to Dovish Forward Guidance
AUD/USD extends the series of higher highs and lows from earlier this week as the Federal Open Market Committee (FOMC) retains a dovish forward guidance for monetary policy, and the exchange rate may continue to track the upward trending channel carried over from March as governments across Australia unveil plans to gradually roll back the lockdown laws.
Efforts to reopen the economy may encourage the Reserve Bank of Australia (RBA) to establish a wait-and-see approach for monetary policy as “a recovery was expected once the COVID-19 outbreak was contained,” and the central bank may continue to change its tune at the next meeting on May 5 as the update to the Consumer Price Index (CPI) points to sticky inflation.
The RBA may tame speculation for additional monetary support asthe “various responses were providing considerable support to Australian households and businesses,” and Governor Philip Lowe and Co. may strike a more balanced tone after “members noted that, if conditions continued to improve, it was likely that smaller and less frequent purchases of government bonds would be required.”
In turn, the RBA may offer little guidance as the central bank carries out the yield curve control program for the 3-Year government bond, but the threat of a protracted recovery may put pressure on Governor Lowe and Co. to further support the economy as the International Monetary Fund (IMF) forecasts Australia to contract 6.7% this year.
With that said, the economic shock from COVID-19 may produce headwinds for the Australian Dollar as the update to China’s 1Q Gross Domestic Product (GDP) report revealed a pronounced decline in the growth rate, but the near-term recovery in AUD/USD brings the March high (0.6685) on the radar as the exchange rate tracks the upward trending channel from March and extends the series of higher highs and lows from earlier this week.
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AUD/USD Rate Daily Chart
Source: Trading View
- Keep in mind, the monthly opening range has been a key dynamic for AUD/USD in the fourth quarter of 2019 as the exchange rate carved a major low on October 2, with the high for November occurring during the first full week of the month, while the low for December materialized on the first day of the month.
- The opening range for 2020 showed a similar scenario as AUD/USD marked the high of the month on January 2, with the exchange rate carving the February high during the first week of the month.
- However, the opening range for March was less relevant, with the high of the month occurring on the 9th, the same day as the flash crash.
- Nevertheless, the advance from the yearly low (0.5506) may continue to evolve as the rebound from channel support pushes AUD/USD to a fresh monthly high (0.6559), with the break/close above the Fibonacci overlap around 0.6520 (38.2% expansion) to 0.6540 (78.6% expansion) bringing the 0.6600 (50% expansion) to 0.6650 (61.8% expansion) region on the radar, which sits just below the March high (0.6685).
- The Relative Strength Index (RSI) has deviated with price as the oscillator snaps the bullish formation from March, but will keep a close eye on the indicator as it approaches overbought territory.
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— Written by David Song, Currency Strategist
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