Australian Dollar Strength on Hold Thanks to Overbought Conditions, RBA Minutes, Aussie Employment Data is Key Risk on Horizon

The Aussie is likely to continue its period of strengthening over coming weeks, but the time-out we are seeing at present could extend.

• RBA minutes fail to boost Aussie dollar as they have done in the past
• Thursday's employment data is next big hurdle
• Our studies forecast GBPAUD to continue higher short-term with target at 1.9389 on signs of AUD fatigue.

A soft start to the new week for the Australian currency, but the mood music remains cheery and we expect any weakness to ultimately prove short-lived.

At the time of writing the pound to Australian dollar exchange rate is at 1.9045 as the Reserve Bank of Australia's minutes from the March meeting fail to deliver that feel-good factor so often imparted in recent releases.

There is a standout message in the March minutes - and that is employment matters for policy, and thus the currency, going forward.

"There was quite a bit of discussion around the labour market and in our view the near-term trajectory of the unemployment rate remains critical to the monetary policy debate," says Felicity Emmett at ANZ.

ANZ say they see the unemployment rate stabilising around the 5¾-6% mark over this year, given reduced stimulus from housing and the lower AUD.

Latest Pound / Australian Dollar Exchange Rates

	Live: 2.0121▼ -0.2% 12 Month Best: 2.1645
*Your Bank's Retail Rate	1.9437 - 1.9518
**Independent Specialist	1.984 - 1.992 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

"While the recent weakness in ANZ job ads supports this, measures of capacity utilisation and business profitability have ticked up and require close watching," says Emmett.

ANZ say they see two 25 basis point interest rate cuts coming from the RBA in 2016 with May and August being the most likely dates.

"We have noted previously, the Bank will remain uncomfortable with the unemployment rate at or close to 6% and inflation at the bottom of the target band. We continue to expect two 25bp cuts from the Bank this year, with May and August the most likely timing," says Emmett.

Employment Data is Key Risk to Aussie Dollar Strength

Turning to the Australian dollar's fundamental settings, it is Thursday's employment report that carries the most weight, arguably even more so now in the wake of the release of the RBA minutes.

Employment matters as it is now deemed to be the main target of RBA policy - and RBA policy is important as it is the level of interest rates set by the central bank from which the Aussie derives much of its strength.

The importance of employment levels to policy was emphasised on the 8th March by RBA Deputy Governor Philip Lowe when he said unemployment would be the ultimate arbiter of whether or not the RBA acts on its professed easing bias.

Markets are looking for a rise in employment of 10K.

"A further rise this week (in unemployment) would likely see easing expectations ratchet higher and take at least a temporary bite out of the AUD," say NAB in a note to clients.

How Far can the Pound's Rebound go?

There are reasons to believe pound sterling could be in for a chance with the GBP/AUD charts suggesting an oversold currency pair could recover.

The pound sterling has enjoyed a relatively decent March after the Brexit hoo-ha that saw a poor end to February.

"Perhaps it is boredom, perhaps it is the awful prospect of 100 days' more mud-slinging on both sides of the debate or perhaps it is just a reflection of sizeable short GBP positions having already been established, but the fact is that the British pound has not performed particularly badly over the last fortnight.

Whilst it has gained on the USD, EUR, JPY, CHF and NZD it has lost ground to the all-conquering AUD.

Here too though there could be a chance for moves higher. GBP/AUD had already been showing several tentative reversal signs having been under pressure for weeks now.

Further warnings of a pro-GBP reversal came on Wednesday March 10 with the formation of a “bullish engulfing” Japanese Candlestick pattern formed.

A "bullish engulfing" occurs after a down-trend when a day opens at a new low but then rises and closes higher than the previous down-day’s open – thus essentially engulfing in its body the previous day’s open-close range.

This is a short-term bullish signal, and importantly it remains relevant.

We also note the recent formation of a 'key reversal' which also occurs at the end of a trend, when the exchange rate makes a new low and then rebounds to make a high, which is higher than the previous day and a close which is above the previous day’s open.

This is a strong medium term signal of reversal.

Furthermore, as has already been pointed out before with this pair, ADX is at an extreme high of 50.50, and any reading over 50 signals the down-trend may be due a correction.

ADX stands for ‘Average Directional Index’ and measures how ‘trending’ the market is. When it goes over 50 research has shown it is often a sign the trend is overextended.

Another, indicator, the RSI, which is a momentum indicator, has now given a buy signal by moving from oversold to above the 30 level.

The pair has also reached a major support line in the form of the S1 monthly pivot at 1.8940.

Monthly pivots are levels of support or resistance calculated using the previous months high, low, close and open.

Traders use them as levels where they predict increased demand or supply and where prices often pause, bounce or sometimes even reverse trend.

The exchange rate has already broken above the peak highs of 1.9236, and is likely to continue higher to an immediate target at 1.9389.

Ideally I would want to see a break above the 1.9245 highs for re-confirmation of a move up to the first target at 1.9389.

There is still a chance, too that the current dominant down-trend may also continue, as long as it manages to break clearly below the S1 pivot.

This would be signalled by a move below 1.8850, with a downside target from there at 1.8500.

Other Events to Watch for the Aussie

Clearly in relation to the AUD/USD pair the US Federal Reserve’s meeting on Wednesday provides a major risk event, and there is probably a greater outside chance the Fed could surprise with a rate hike than most are expecting.

This would lead to an annihilation of the ill-fated bullish recovery in the AUD to USD rate and a renewal of the longer-term down trend.   %).

On Wednesday Guy Debelle, RBA Assistant Governor, Financial Markets, will speak at the FX Week Australia conference in Sydney.

We could get some insight into where he sees the Australian dollar’s appropriate pricing, which could well hint at whether the currency’s recent strength is becoming an in issue.

Later on Thursday Luci Ellis, Head of the RBA’s Financial Stability Department, will speak at the Financial Risk Day 2016 conference in Sydney.