After strong rally AUD reaches a cross-road
This year AUD/USD has ridden high on the back of the recovery in commodity prices, but there are question marks as to whether the rally has any further momentum. In reality, market dynamics are starting to tug in both directions.
AUD/USD is currently hovering below 2017 highs of 0.7743. Whether that remains the high for the time being or can be taken out comes down to four fundamental factors.
These are commodity prices, especially iron ore, the domestic economy, Chinese demand and events in the US.
In terms of commodity prices the rally may be due for a pause and the Reserve Bank of Australia (RBA) said it expected iron ore and some other commodity prices to weaken following a strong up-move due to new Brazilian and possibly Chinese supply, rising stocks and moderating Chinese demand. Mining companies BHP and Fortescue also see a moderation in iron ore prices – suggesting AUD will struggle to rally much further.
There are some concerns over the domestic economy. House prices are very high as is consumer indebtedness suggesting future domestic consumption prospects could be dimed. Though unemployment is low, wage growth remains weak as does business investment. Meanwhile, the RBA is expected to maintain rates at a record low 1.5%. These are bearish risks for AUD.
China is still going through a transformation from export-led to a consumption-driven economy and has so far avoided a serious economic crisis. This is bullish for AUD as China will still require many commodities, which Australia can provide, though the mix of raw materials may change over time.
Then there is the US, where there is tremendous policy uncertainty. New US Treasury chief Steven Mnuchin talked about reforms not pushing US economic growth to 3% before late 2018. Meanwhile, recent minutes from the US Federal Reserve’s FOMC suggested the central bank is not as hawkish as markets thought it was, though a March rate hike can’t be ruled out. All this has capped USD strength for the time being, which is bullish for AUD.
Overall AUD/USD appear to be in for a tug of war until one of these fundamentals gains the upper hand. Though if iron ore and other raw material prices are set for a sustained pull-back, then it is quite likely that AUD will be dragged lower.
TECHNICAL ANALYSIS: AUD/USD – looking over-stretched
From a technicals perspective, AUD/USD is beginning to look over-stretched. The pair are bunched tightly between the middle and upper Bollinger band on the dailies, and though the daily RSI has retreated from over-bought, it is still at quite elevated levels. As the pace of the rally has dissipated, as can be seen with the 14-day momentum indicator, and daily MACD and slow Stochs are issuing sell signals.
It may of course just be a temporary pause, in which case the following resistance levels need to be taken out. These are 0.7714-7, 0.7741-3, the 2017 high, and ultimately 0.7778, the November 2016 high.
However, AUD/USD took a dive on Friday and markets may now decide to probe the downside for a while. Support levels to watch out for include 0.7626, 0.7585-7 and 0.7505
By Justin Pugsley, Markets Analyst, MahiFX