The contents of the recent RBA minutes and a breakout in the silver price have increased the upside potential for the AUD to USD exchange rate in our view.
- "Whilst the EURAUD is currently battling with a particularly robust long-term support, breaking out here could send the pair even lower" - Matthew Ashley at Blackwell Global
- Recovery in silver prices bodes well for an extension of AUD
- Our forecast for AUD/USD is for a move above the current 0.7810 highs to reach 0.7889.
The AUD has been relentlessly gathering momentum over the past few weeks and it doesn’t appear to be slowing; the currency has broken out of a long-term consolidation against the US dollar and staged a moved higher.
The pair has now rallied clear of resistance in the 0.77s and now looks set to move up towards the 0.80s.
Analysts who expected it to continue its march higher will feel vindicated by the upside breakout, as the pair had been the focus of much recent debate over whether the currency was topping or not, and today’s activity appears to have resolved that debate, in favour of more upside.
One of the key drivers for the break higher was the release of the Reserve Bank of Australia’s (RBAs) April meeting minutes which suggested that the board were in no hurry to cut interest rates, as many investors had expected.
According to the wording of the document the RBA said that lower inflation alone was not enough to justify a rate cut but they would also have to witness a decline in the job market.
Recent labour market data, however, has been better-than-expected, with the unemployment rate falling from 6.0% to 5.8% in February, and then 5.8% to 5.7% in March. Although the quality of the employment gains has been questionable, the headline figure’s improvement is considered sufficient to keep the RBA’s ‘finger off the button’.
Expectations of when the central bank might make its next rate cut have fallen drastically. Interest rate swap futures, a commonly used market gauge of rate expectations, are now only pricing in a 51% chance of the RBA cutting interest rates in December 2016.
Keeping interest rates at their relatively high 2.0% level, which is the second highest in the G10, behind New Zealand (2.25%), would be a great boost to the Aussie Dollar.
Currencies with higher interest rates tend to strengthen as international investors flock to invest in assets on their shores, in order to take advantage of the higher potential return they can make on their money.
Will the RBA Tolerate an Even Stronger AUD?
As mentioned, AUD has broken the psychological USD0.78 level in a positive ‘risk’ session.
In their latest set of policy minutes Australian central bankers noted that the recent appreciation of Aussie could complicate the rebalancing of the economy highlighting that the services export sector could be particularly impacted by the move.
"For that reason the RBA stated that monetary policy will remain highly accommodative, but in fact that simply means that the central bank will remain stationary for the time being," says Boris Schlossberg at BK Asset Management.
Schlossberg and a number of other analysts believe that 0.80 is the threshold RBA policy makers will entertain on the Aussie's strength, "but if the pair begins to move much higher than that the central bank will become much more aggressive in its efforts to lower the exchange rate."
RBA Governor Glenn Stevens’ speech in New York on Tuesday was globally focused and had no impact on the AUD.
The currency should continue to trade with risk sentiment. Keep an eye on commodity prices as oil has clearly shaken off the Doha drop and has supported commodity currencies during the NY trading session.
A further rally in equities will also be supportive of the AUD.
Silver Surges, What Does This Mean for AUD?
As one of the largest silver producers in the world the news that Silver has surged 4.4% in a single day will be music to Aussie bulls’ ears.
Importantly, the rise in silver does not appear to be an isolated random appreciation, but rather part of a budding up-trend as the commodity looks like it is about to start a new bull trend higher after falling for several years.
What does this tell us about the commodity complex in general? If the same could be said about iron ore prices, for instance, then the AUD really could be about to take off.
A chart of silver prices shows it breaking out of an inverted head and shoulders (H&S) reversal pattern at the lows.
These tend to appear at the end of down-trends when prices have reached exhaustion point and are set to reverse and start to go higher.
Assuming this is the start of a trend higher for Silver, it may also mean the start of a trend higher for precious metals in general, of which Australia is a major producer.
According to Christopher Vecchio, analyst at DailyFX, Silver leads the other precious metals higher:
“Silver prices, which we discussed last week as having the tendency to lead when precious metals rally broadly and the US Dollar falls, is breaking out today.”
Normally precious metals don’t rise in isolation, but are part of a general commodity cycle rally.
Along with the recovery in oil and Iron Ore, a potential rally in Silver adds to the evidence commodities may be ‘turning’.
Again, if this is so it is a positive for the Aussie.
But even more significant for the AUD/USD pair is that a rally in precious metals tends to correlate negatively with the value of the US dollar, which is likely to start weakening.
Therefore, if anything we expect the rally higher in AUD/USD to strengthen even more rapidly than previously.
As far as upside targets in the present rally go, Swissquote’s Tech team note 0.8295 as a key medium-term resistance level.
Singapore based bank OUB place the next target at 0.7850.
Commerzbank concur with OUB, but also have targets higher at 0.8030 and 50.
We note the key R2 Monthly Pivot is at 0.7889, and likely to provide substantial resistance to any moves higher.
Further Declines in EUR to AUD Conversion Forecast
The euro is also despeately trying to defend itself from the advances of the Aussie. The pair hit a high above 1.62 in February, but that appears to have been the limit.
We have since seen the euro to Australian dollar exchange rate fall back towards 1.4460 where it is quoted at present.
"Whilst the EURAUD is currently battling with a particularly robust long-term support, breaking out here could send the pair even lower," says Matthew Ashley – FX Research Analyst for Blackwell Global.
Ashley says a nascent impulse wave pattern is forming and a break in support at 1.4483 could see the second leg complete.
"In this event, the completion of the pattern could result in the pair plummeting down to 1.3986 before it finds support," says the analyst.
Furthermore, Fibonacci retracement demonstrates that the current support is at the 100% retracement level of a previous downswing.
In addition, the new bottom at 1.3986 is the 127.2% retracement level which should provide some stiff support should the impulse waves complete
Ashley notes the pair's EMA indicators and the ADX oscillator are also signalling that the EURAUD is poised to continue to tumble.
The 12, 20, and 100 period EMA’s on both the daily chart and the H4 chart are in agreement that this pair is strongly bearish.
"Moving ahead, this pair may need some additional assistance from a fundamental result release to break support but should eventually reach a new bottom at 1.3986," says Ashley.