The American currency became the best performer on Forex this week. Yesterday, the US dollar index soared from 93.36 to a high of 94.12. The indicator hit a new monthly high, proving the increased interest of traders in the US currency. The greenback gained support from two favorable factors: the coronavirus woes coincided with the release of data on US GDP growth in the third quarter, which turned out to be extremely strong. In addition, Donald Trump's promises to adopt a large-scale stimulus program right after the election gave rise to the US dollar. What is more, a decreased number of initial jobless claims boosted the demand for the US dollar. All of these factors played in the greenback's favor, generating a spike of interest around USD. On top of that, the collapse in the oil market has caused massive risk aversion and increased the demand for the American currency. In other words, USD was the only currency to benefit from the current situation. The yen also depreciated yesterday against the greenback. Traders still see the US dollar as a safe haven where they can stay until better times.
USD was also supported by macroeconomic reports. According to forecasts, the US economy was supposed to set new records in the third quarter of 2020 and was projected to expand by 32%. In the second quarter, however, an anti-record was set as the GDP declined by 31.4%. The real data turned out to be better than expected: the GDP increased by 33.1%, showing the highest growth rate on record. Consumer spending also surged by 40.7% against the forecast of 38%, while the GDP price index jumped by 3.6%. Personal consumption expenditures also showed a rapid rise to 3.5%, falling slightly short of analysts' expectations of 4%. The rest of the release data was upbeat as well: the volume of business investments increased by 20%, exports surged by almost 60%, while imports soared by 91% (!).
Although investors expected to see improved indicators, the actual result exceeded all expectations. This fact allowed the US dollar to consolidate gains and strengthen against its rivals, including the Australian currency. Given the current market sentiment, testing the 0.7000 mark was only a matter of time. Indeed, the AUD/USD bears quickly hit this level and at one point pushed the price to the area of 69.
Yet, it is still unclear whether the downtrend will continue. Last year, the pair was holding at the support level of 0.7000 for several months. In early 2019, bears made several attempts to break below this target, but each time the price pulled back. Later in 2019, the situation turned the other way round: the 0.7000 level became a benchmark point and this time served as a resistance level. The AUD/USD bulls approached the level of 70 more than ten times, but in the end, the price was still stuck below this mark. In other words, this target has a special meaning for the Aussie.
With this in mind, we can assume that the current struggle for the 69 area will be tough for the bears. In particular, we are talking about consolidation within the 69th price level with further development of the downtrend. Of course, the price may still fall sharply below 0.7000 and may even stay below this level for some time as it happened yesterday, for example. However, it is not a good idea to consider short positions in this case as there is a possibility of hitting the price bottom due to some downside risks.
First of all, the US presidential election will take place next week. It is quite difficult to predict the dollar's reaction to this event since the American currency can be used as a safe haven asset during a period of political turbulence. Moreover, the outcome of the election is a big mystery itself. Opinion polls show that nationwide Joe Biden is significantly ahead of Trump by 12%. However, the gap between the candidates in the so-called "battleground states" is very small. Voter in these states may largely influence the outcome of the election. Therefore, Biden's victory is far from a foregone conclusion, and the struggle for the White House may continue after the election in the US Supreme Court.
Secondly, the November policy meeting of the Reserve Bank of Australia is also scheduled for next week. The market has already priced in a 15 basis point rate cut, as Bank's Governor Philip Lowe has given a clear hint about it. However, there are speculations that the RBA may resort to stronger measures, including a reduction of the rate to zero level, that is, by 25 basis points. If the Australian regulator follows the first scenario and indicates its a wait-and-see position, the Aussie may regain its ground.
Thus, at the moment it is better not to open any positions on the AUD/USD pair. For all the reasons mentioned above, including the end-of-the-week factor, the US dollar is likely to advance, thus pushing the pair to the area of 69. I think that the bears will not be able to keep the price at this level. However, it is better to wait for the end of the dollar's rally before opening long positions from the 0.7120 mark (the middle line of the Bollinger Bands indicator, which corresponds to the Kijun-sen line on D1).
