RBA Governor Lowe adds to AUDUSD woes

In a note earlier this week, we reviewed the implications of a move by Chinese authorities to relax the 20% reserve requirement on China FX derivatives and to suspend imports of Australian coal, both of which were viewed as being a headwind to the AUDUSD.

Charts (3)

While the change to the reserve requirement has since been largely brushed off by USDCNY, now trading back near the 6.72 level, it has provided no relief for the AUDUSD.

In a further setback to the AUDUSD, RBA Governor Phillip Lowe hinted in a speech this morning the RBA will cut the cash rate by 15bp to 0.1% along with the term funding facility rate and the 3yr bond yield target at its upcoming November 3 meeting.

The market had already moved to reflect this expectation. However coming as somewhat of a surprise, a significant dovish shift in the RBA’s forward guidance. The Governor committing not to raise the cash rate until actual inflation is sustainably within the RBA’s 2-3% inflation target, meaning the cash rate is unlikely to be raised for 3 years.

In effect, the RBA is moving to an inflation-targeting framework similar to the one formally announced by the Federal Reserve at the recent Jackson Hole Symposium.

This has overshadowed the release of marginally better than expected Australian employment data for September. However, the jobs data also confirmed the labour market remains fragile with abundant excess capacity. Until this is absorbed, the RBA will fail to meet both their employment and inflation targets.

As can be viewed on the chart below, the AUDUSD is now testing crucial uptrend support coming from the March .5508 low. A daily close below the trendline would indicate a deeper pullback is underway including a retest of the September .7006 low with risk towards the 200 day moving average at .6789. Keeping in mind a lower AUDUSD serves to help the RBA achieve their goals.

To alleviate the downside risks and suggest the pullback is complete, the AUDUSD would need to reclaim uptrend support and this week .7243 high.

RBA Governor Lowe adds to AUDUSD woes

Source Tradingview. The figures stated areas of the 15th of October 2020. 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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