Pound to Australian Dollar Tech Forecasts: AUD has Further to Fall

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Charts don’t lie. So what are they saying now, following the RBA’s surprise decision to cut interest rates at its meeting on Tuesday May 3?

The Aussie weakened across the board following the Reserve Bank of Australia's (RBA decision to cut interest rates from 2.0% to 1.75% at its May policy meeting.

Not only did the RBA hurt the Aussie, but the big story on foreign exchange markets is the sharp decline in commodity currencies. 

The Australian dollar led the move but the Canadian dollar was the main focus during the North American session. 

Oil prices dropped over 2%, leading to the strongest one-day rise in USD/CAD since March. The sharp decline in oil and corresponding move in the currency has many traders wondering if tops are in place for the likes of CAD, AUD and NZD.

Aussie Dollar Takes a Hit

The reason cited by the RBA for the cut was the sharp decline in inflation reported in April, however others note that it may have been an increasingly expensive AUD that drove the decision.

Lower interest rates are generally negative for currencies because they lessen the attractiveness of banking in the country for foreign investors.

The cut came as a surprise and that the aussie sold off heavily following the release.

AUD/USD lost over 150 points, taking it from 0.7710 down to 0.7560 in a matter of minutes.

This has changed the look of the AUD/USD chart radically.

AUD/USD is not likely to fall any lower in a hurry, due to several tough support levels currently underpinning price at its new level.

The first of these is a major trend-line situated not far below its current level in the 0.7540s.

The 50-day moving average, a key level is also preventing further decline, as it provides the exchange rate with a base at 0.7570.

At both these levels we would anticipate traders entering the market to buy the Australian Dollar in expectation of its rising.

The rate decision, however, appears to be a ‘stake to the heart’ event for the Aussie and we see more decline as probably the more likely scenario from here.

This means the trend-line and the 50-day will in all likelihood be broken, however, I would not actually turn completely bearish the pair unless it broke below the key 0.7500 level, which has historically provided a boost for the exchange rate every time it has fallen to it.

It would require a break, therefore, below 0.7500, and then 0.7441, where the S1 monthly pivot – another formidable support level - is situated to be more confident of a bearish trend-change.

Ideally, we would wait for a move below 0.7400 for the ideal confirmation of more downside to come, with the next target at 0.7300.
Up until then there remains a risk the up-trend could resurface.

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Pound to Australian Dollar Outlook

The pound to aussie rate is showing a continuation of the young bullish trend which began at the 1.83 April lows.

The RBA release gave the trend a further impetus for another break higher, and it reached out target at 1.9730.

Although there are no signs of this move ending it could slow-down soon, and possibly start going sideways, as the RSI indicator has reached 68, which is quite close to giving an overbought reading (of over 70). An overbought reading signals traders should not open anymore buy orders.

The MACD indicator is above zero. Indicating the pair is now in an up-trend, which is a bullish inference.

Given how close the pair is to being overbought, we would caution against being overly bullish in the very short-term, as a pause may soon occur; however we do eventually foresee more upside once the period of consolidation has ended.

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Deutsche Bank: Not too Late to Chase the AUD Lower

According to a note from Deutsche Bank, the recent interest rate cut by the RBA goes beyond risk management, "it marks a shift in the near-term target from unemployment to inflation."

Given stagnant wage growth, the exchange rate will need to do the grunt work in getting core inflation from 1.5% back above 2%.

Deutsche estimate that the RBA needs a 10% depreciation just to stabilise core inflation into 2017; a return above 2% will likely take more.

With only 21bps of further easing priced, Deutsche Bank continue to think that the market likely underestimates the magnitude of the fundamental adjustment ahead.

Hence, the RBA needs significant further depreciation even just to maintain the current inflation boost from past currency movements.

A simulated one-off depreciation of 10% would just about do the job.

"To get to 2%, the RBA would need to rely on other factors such as wage growth, which however has proven insensitive to monetary stimulus in Australia, as in other developed economies," say Deutsche Bank in a note to clients.

The RBA is therefore likely to need more than a 10% depreciation, consistent with AUD/USD in the low 0.60s.

"It’s not too late to go short in our view," say analysts.