The Australian dollar setbacks continue, and we have seen the headline AUD/USD extended well off the recent 2016 peak, with the market breaking back below the 200-Day SMA.
- Pound to Australian dollar exchange rate = 2.0403
- Australian dollar to US dollar exchange rate = 0.7208
Such a technical break on the charts betrays a market that is structurally biased against the AUD and suggests an ever-increasing mountain of work that must be overcome to restore strength.
“At this point, the focus has shifted back on the downside, though there is risk for a decent corrective bounce or period of consolidation now that the longer-term moving average has been tested and broken. Still, any rallies should be well capped ahead of 0.7500 in favour of additional declines, potentially back towards the 2016 base at 0.6827,” says a technical note issued by LMAX Exchange.
Although we have seen the AUD to USD exchange rate attempt to trade back above the 0.72 threshold, CIBC’s Jeremy Stretch says he would not expect the AUD downtrend to be breached unless we close above the 200-day SMA, currently 0.7255.
“With iron ore prices continuing to correct lower amidst ongoing discussion of ongoing disinflation concerns, which will impact RBA thinking, we remain biased towards a test back towards 0.7110 and below there 0.7070,” says Stretch.
Iron remains Australia’s number one export and is therefore critical to the country’s balance of payments which in turn determines the trade weighted value of the Aussie dollar.
Pound Tears Chunks Out of Aussie
The Australian dollar was seen softer after the release of 'construction work done' data that showed a decline again in Q1, led by further weakness in resource-related engineering construction, as well as a sharp drop in non-residential building.
These data suggest to us that business investment will be a drag on next week’s GDP outcome and will likely only further stoke bets for another interest rate cut at the Reserve Bank of Australia.
As markets gear up for another rate cut, which will likely take the rate to 1.5%, expect the AUD to reain under pressure.
However, the British pound side of the equation is also seen to be offering strong guidance for this pair.
The pound rose by 1.78% versus the Australian dollar after a new opinion poll showed the ‘Remain’ campaign with another big lead.
The latest ORB poll, published in Tuesday's Telegraph newspaper, showed that the “Remain’ campaign with a 13-point lead over the ‘Leave’ campaign.
Support for remaining in the EU stood at 55%, while support for Brexit was at 42%.
Sterling’s gains were particularly strong versus the Aussie, which has been suffering from increased expectations the Reserve Bank of Australia (RBA) will reduce interest rates at some point in the near future.
On Tuesday the currency took a further hit after a speech by Stevens was unflinching in its analysis of the current situation, reiterating that the RBA would set interest rates in line with inflation, which are currently languishing at four year lows of 1.3%, and imply a further rate cut in the pipeline.
Low interest rates weaken a currency as they attract less inflows of foreign capital seeking high returns; the AUD/USD pair hit a fresh 3-month low.
On Monday, Prime Minister David Cameron said leaving the EU would be tantamount to economic self-destruction, as he presented a finance ministry report warning of recession, a sharp fall in the pound and half a million job losses, in the event of a Brexit.
On Tuesday, Bank of England (BOE) official Martin Weale echoed these remarks, saying a Brexit could increase the chances of a recession, when he testified in front of a Treasury Select Committee about the outlook for inflation.
Meanwhile, data out on Tuesday showed the British government borrowed more-than-expected in April, whilst the budget deficit for the previous financial year was revised up.
The Office for National Statistics (ONS) said public sector net borrowing came in at £7.2 billion in April, down 4.4% from a year earlier.
Economists had forecast a lesser shortfall of £6.6 billion.
Though falling against the pound, the dollar rose in other pairs, after commentary from St. Louis Fed President James Bullard, suggested more factors favoured a gradual rate increase as opposed to keeping them unchanged.
Bullard has traditionally erred on the side of waiting due to low inflation so his comments were taken as a cue for a potential rate hike in the short-term.
The remarks supported the stance communicated in the Fed April meeting minutes that the Fed was closer to raising interest rates than markets were currently pricing in.
The minutes led to a boost in the dollar as they suggested an interest rate rise in June was back on the cards.
From only a 4% probability of a June hike before the release of the Minutes, the probabilities rose to 28% after.
The probability of the Fed hiking in July, meanwhile is over 50%.