The AUD/USD pair declined to a monthly low during the previous week amid general risk aversion and accordingly, the general strengthening of the US dollar. The increased volatility in the US stock market rebounded on the major dollar pairs: as soon as the key indices collapsed, the market resorted to safe US currency and vice versa – as soon as the stock market showed positive dynamics, the US dollar actively lost its positions amid a general decline in anti-risk sentiment.
To simply put, the growth of the US currency was extremely unreliable and situational. Last week, the US dollar index remained within the flat range of 90.4-90.9, reflecting the contradictory attitude of the market towards the greenback. This fact allows us to assume that the downward impulse for the AUD/USD pair is just a corrective decline after an unsuccessful attempt to reach the level of 0.78.
During today's Asian session, the Australian dollar managed to rise by almost 50 points, while the US dollar index practically stagnates around the 90.50 mark. This suggests that the AUD/USD pair is growing not because of the US dollar's weakness, but because of Australian dollar's positive dynamics. The price growth is due to two factors: First, good macroeconomic reports were published today. And although these are considered secondary reports, they served as a kind of confirmation of the positive trends that were reflected earlier in the key releases. Second, the Australian dollar is in demand in view of the Reserve Bank of Australia's first meeting of the year, which will be held tomorrow.
Let's start with macroeconomic statistics. Today, the AiG manufacturing activity index (the Australian equivalent of PMI) was published, which not only remained above the key level (50-point mark) in January, but also showed positive dynamics relative to the December value (55.3 points in August against 52 points in December). In general, this indicator has been above the 50-point mark since October last year, that is, after Australia's strict quarantine restrictions were eased. Therefore, on the one hand, traders were not quite excited with today's growth; on the other hand, the published data was another argument in favor of maintaining the RBA status quo at tomorrow's meeting.
There were rumors that the Australian regulator will soften the parameters of monetary policy by expanding the volume of the stimulus program since the end of last autumn. The implementation of such a scenario was allowed by the RBA members and directly by the Central Bank's head, Philip Lowe. The probability of such a scenario is also mentioned in the minutes of the last meeting of the Australian Central Bank.
However, January's key releases were just right in the "green" zone, reflecting the economic recovery of Australia. For example, the overall consumer price index in the Q4 exceeded the preliminary forecasts of most experts. The indicator rose by 0.9% (with a forecasted growth of 0.7%) both on an annual and quarterly terms. According to the RBA (using the truncated average method and the weighted median method), the core inflation index also showed positive dynamics, reflecting the recovery processes. The latest data on the Australian labor market similarly came out in the buy zone, contrary to experts' pessimistic forecasts. The unemployment rate declined to 6.8%, against experts forecast around 7%, and the growth rate of the number of employed surged by 90 thousand, instead of the predicted 40 thousand. At the same time, the indicator grew primarily due to the growth in full employment.
Amid such trends, the probability of QE expansion has noticeably declined. Therefore, the main intrigue of the RBA's February meeting is different: will the regulator extend the duration of the asset purchase program (which is initially due to end in April) or will it decide to curtail QE this spring? There is no consensus among experts on this, although most analysts polled by Reuters are inclined to believe that the Central Bank will still extend the stimulus program. A similar opinion is shared by currency strategists at National Australia Bank. However, the economists of Capital Economics voiced the opposite position – in their opinion, the regulator will present more optimistic forecasts for GDP growth, inflation and the labor market at the February meeting, while noting positive trends. In this context, RBA members may announce that the Central Bank will reduce the volume of purchases from the 5-billion mark to 2-billion from April, but the option of a complete curtailment of QE this spring is not excluded.
It is clearly seen that the results of the February meeting continue to be intriguing. Therefore, we can expect increased volatility for the AUD/USD pair tomorrow. In my opinion, the RBA is unlikely to announce the termination of the QE program and will announce its prolongation. At the same time, the regulator's rhetoric might be quite optimistic, positively assessing the latest releases in the labor market and inflation. It is also noteworthy that the Australian economy contracted by about 3% according to preliminary estimates last December. This result, on the one hand, is negative, but on the other hand, the Central Bank previously predicted a 6% decline in GDP and an increase in the unemployment rate to 10%. Taking into account the latest releases, we can say that the RBA's pessimism was not justified – the key indicators withstood the blows of the coronavirus crisis.
Therefore, the results of tomorrow's meeting may significantly support the AUD. In this case, longs can be considered for the AUD/USD pair in the mid-term – either from the current positions or upon breaking the nearest resistance level of 0.7685 in the D1 time frame, from which the Tenkan-sen and Kijun-sen lines have coincided. If the price consolidates above this target, the Ichimoku indicator will form a bullish signal "Parade Lines", opening the way to the resistance levels of 0.7730 (middle Bollinger Bands line on D1) and 0.7800 (upper Bollinger Bands line on the same time frame).
