AUD has suffered a spectacular turn in fortunes having fallen notably this May but we could see some temporary relief on oversold conditions over coming days while others are outright bullish.
- Australian dollar firms as oversold conditions unwind, consolidation seen near-term
- Extension lower over coming medium-term timeframe still expected by big-name analysts
- Forextell's Sean Lee tells us where he will buy the Aussie dollar ahead of a more sustained rebound
The Australian dollar was the worst performing currency in the G10 space in the first week of May thanks to the Reserve Bank of Australia (RBA) both cutting inflation forecasts and the base interest rate from 2% to 1.75%.
The sell-off gathered pace at the start of the week as closely watched Chinese trade statistics confirming declining demand amongst Chinese importers.
Chinese imports plummeted 10.09% on an annual basis in April delivering an unambiguous message - Australia exporters would have to deal with the fact demand from their number one client is spiralling lower.
The GBP to AUD exchange rate rose to above 1.97, the best levels seen since mid-February and confirms the recovery off lows at 1.84, seen in late April, is healthy.
The AUD to USD exchange rate was quoted at 0.7329, levels last seen in March.
"The combination of weaker Chinese trade data and correction lower in commodities prices (iron
ore, steel and rebar) is further weighing on AUDUSD following the dramatic slashing of the RBA’s
inflation forecasts last week. As a result, investors look to be fading rallies higher toward 0.7430 with major support now seen coming in at the 200d MA at .7261," say Citigroup in a foreign exchange briefing.
Commodity Market Dynamics Give Reason for Concern
Further bad news was piled on the Aussie as iron ore prices continue to fall as inventories in Chinese ports hit their highest levels in more than a year.
Iron ore is Australia’s number one export and therefore has a notable impact on the country’s trade balance, and thus exchange rate.
Stockpiles climbed 1.4% to 99.9mt last week marking the highest reading since Mar/15.
This takes the annual increase to 7.3%.
Qingdao port delivered 62% Fe iron ore is quoted at US$58.3/t, according to Metal Bulletin data.
Futures trading on the Dalian Exchange traded at CNY 403.5/t (US$62.0/t), down from CNY 412.5/t on Friday and CNY 479/t on 25 Apr/16.
And it gets worse, copper prices are down 1.7%c on the back of poor Chinese economic data and strengthening US$.
Shipments of unwrought copper and products fell to 450kt in April, down from 570kt in Mar, Chinese customs reported on Sunday.
Is the Australian Dollar Now Oversold?
The outlook for sterling-Aussie is, in our opinion, undoubtedly bullish and we have said we are expecting 2.0 to be achieved.
However, there are concerns amongst some analysts watching the market that the sell-off in AUD is reaching over-extended levels.
The Relative Strength Index (RSI) on the GBP/AUD exchange rate’s daily chart is now clocking in at 76.1. Any reading above 70 is considered to be indicative of a pair that is overbought.
The last time sterling was seen at overbought levels was in August 2015. It was the come-down from these over-extended levels that saw the start of the long-term decline from 2.20 to the 2016 lows in the 1.84s.
The Australian to US dollar exchange rate has by contrast touched oversold conditions with a reading of 30 being seen on the daily chart.
This has lead analyst Quek Ser Leang at United Overseas Bank to forecast an easing in the pace of the Aussie dollar’s declines going forward:
“From here, allow for a retest of 0.7340 but 0.7300 is expected to hold for a recovery to 0.7410.
“The recent sharp drop in AUD appears to be running ahead of itself and those who are short should take partial profit at 0.7340 (low has been 0.7338).”
While further extension to 0.7300 is not ruled out, UOB are still of the view that the current drop is over-extended and expect this pair to consolidate at these lower levels for the next couple of days.
“A move above 0.7480 would indicate that a short-term low is in place,” says Leang.
Where to Buy AUD/USD
Professional currency speculator Sean Lee, who runs Forextell, says he is still quite bearish on the USD and will be looking to bet on an AUD/USD recovery.
Lee reckons the AUD/USD's recent decline is a "relieving retracement" and he is now I’m looking for the USD bear move to recommence.
"Timing as always is everything but I’m happy to stick some offers in against the JPY, EUR and AUD," says Lee, "AUD/USD broke below initial support at .7335 but there will be stronger levels near the 200-dma at .7265."
The trader is waiting for any intraday dips towards this level before hitting the BUY button.
Fundamentals Argue for Further Weakness (And Then Recovery)
The debate over oversold conditions and rebounds is largely technical in nature and we would suggest the fundamental nature of the market does not back up a pro-AUD stance.
At the core of the AUD’s outlook is the interest rate held at the RBA which determine the yield offered on a host of Australian assets.
The cutting of this yield will likely deter future foreign investment flows into Australia, thus cutting support for the AUD.
A number of analysts point out that the RBA typically follows one interest rate cut with another, so markets will likely be net sellers of the AUD over coming months in anticipation of the cut.
“We confirm our expectations for a further weakening of the AUD (towards the medium-high end of the AUD/USD 0.70-0.65 range) on a 1m-3m horizon, where uncertainty and the risk of the RBA possibly proceeding to another rate cut are highest,” says Asmara Jamaleh at Intesa Sanpaolo in Milan.
The next monetary policy meeting will be held on 7 June, but before then expect the AUD to be responsive to the minutes of the latest meeting, held on 17 May, will be released, followed by labour market data on 19 May, and 1Q GDP growth on 1st June.
The RBA’s subsequent meeting will be held on 5 July, and on 27 July 2Q inflation will be released.
The new growth and inflation scenario will be outlined ahead of the RBA meeting of 2 August.
Intesa Sanpaolo are however geared for an AUD recovery towards the end of the year as the impact of lower interest rates has the desired positive effect on the economy.
“Once the RBA’s accommodative monetary policy cycle will have ended, the level of domestic rates will in any case be higher than in the other advanced economies, with the sole exception of New Zealand, says Jamaleh.