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Australian Dollar Draws Support from Fading Trade War Chatter say Maybank

- Aussie is dependent on open trade for its commodities

- Fading risks of war have supported AUD's recent recovery

- Yet monetary policy and technical risks overshadow bullish talk

© Greg Brave, Adobe Stock

A global trade war would hurt commodity-export-dependent Australia and the fallout would weaken the Australian Dollar.

Likewise, fading trade war risks would be supportive of the Australian Dollar, which explains why the AUD/USD has been rising since the start of the month, according to analysts at Malayan lender, Maybank. 

The recovery is now expected to extend further, from the current 0.7440 level, up to 0.7550 over coming days. A break above the 50-day moving average at 0.7496 would open the door to more upside.

"AUDUSD continued to extend higher as trade tensions ease," says Saktiandi Supaat, an analyst at Maybank. "Current bullish momentum could bring this pair towards the upper bound of the downward sloping trend channel at 0.7550."

Yet comparatively low-interest rates in Australia compared to the US remain an overarching risk to this bullish forecast. 

Currencies with higher interest rates generally outperform those with lower rates because foreign investors prefer to park their capital where they can earn the highest returns, so higher rates attract greater inflows. The base lending rate in Australia, set by the Reserve Bank of Australia is 1.5%; in the US it is 1.75%-2.0%.

Not only that but rates are set to rise much more quickly in the US than in Australia, widening the differential between the two and the advantage the Dollar has over the Aussie. The Fed is expected to raise interest rates at a rate of about a 0.25% per quarter, whilst the RBA will probably not hike rates at all until 2019.

"We no longer look for RBA to hike until early next year (still earlier than consensus) possibly in Feb when the SoMP (statement of monetary policy) will be out. The lack of impetus for monetary policy to change could keep the AUD on the backfoot vs. the USD, given the tightening Fed in the next couple of months," says Supaat.

A look at the charts also places the advantage firmly in the bearish camp. The weekly chart shows the pair having recently broken out of an ascending channel - a major bearish event for the pair.

Above: AUD/USD rate shown at daily intervals.

When prices breakout from rising channels technical lore has it that they probably will fall the same length below the channel as the height of the channel. This suggests the breakdown has further to go to an eventual target at 0.6819.

Using the golden ratio (0.618) of the height of the channel provides a more conservative estimate of the target at 0.7101. A break below the 0.7310 lows would be required for confirmation of more downside.

 

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