Delta spread to see RBA pause tapering, sending AUDUSD to fresh cycle lows

As noted in an article on the ASX200 yesterday, an extension and deepening of lockdowns in Greater Sydney and Victoria will likely see Australian Q3 GDP slide into negative territory. As of today, South Australia has entered a seven-day lockdown joining the drag on economic growth.

FOREX 3

This morning release of the minutes from the RBA's July Board meeting, where it announced a tapering of QE, showed an emphasis on flexibility around its decision to taper.

Given the high degree of uncertainty about the economic outlook, members agreed that there should be flexibility to increase or reduce weekly bond purchases in the future, as warranted by the state of the economy at the time.

The inclusion of this guidance combined with the ongoing risks around the spread of the Delta variant into other states of Australia appears likely to see the RBA reverse its July tapering decision at its August meeting.

Instead the RBA is expected to continue QE bond purchases at a pace of A$5bn/week once the current tranche ends in September, before ultimately starting to taper in November 2021.

The likely postponement of tapering has provided another blow to the AUDUSD, already under pressure from a resurgent US dollar, a sharp deterioration in risk sentiment, and lower commodity prices.

Technically, following Monday's break and close below critical support .7420/00 area, the AUDUSD appears at risk of a deeper correction towards .7200c and possibly towards medium term support .7020/.6990 area (coming from several lows in September and November 2020).

Recent lows in the .7400/20 area should provide initial resistance, with a break and consecutive daily closes above the 200-day ma at .7584 needed to indicate the correction is complete, and the uptrend has resumed.

audusd daily chart

Source Tradingview. The figures stated areas of the 20th of July 2021. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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