Australian Dollar Remains Elevated

The threat of further easing was not enough to reduce the strength in the Australian dollar as the Central Bank moved to once more loosen monetary policy in an effort to fight off sustained disinflationary trends. Although the local currency has long been viewed as overvalued, even at current levels after falling significantly from record highs reached back in 2011, the latest measures have had little impact, leaving policymakers with a new headache as they strive to keep the economy insulated from external developments.

While the Central Bank has pledged not to directly intervene in the foreign exchange markets to adjust the value of the Australian dollar, without a further weakening of the currency, inflation may fall further, potentially reaching deflationary territory if the Central Bank is unable to move the needle lower.

The Exchange Rate Impact

Even though Reserve Bank of Australia Governor Glenn Stevens underscored the moderate growth in the Australian economy during his statement released after the latest monetary policy decision, he did cite exchange rates as a troublesome aspect for the outlook. The main problem with a stronger Australian dollar is that it could conceivably temper gains in economic activity, contribute to less competitiveness for exports, and further hurt the backdrop for inflation.

With inflation trending at a 17-year low, policymakers are having to face the threat of deflation head on, namely with their primary tool which is interest rates. While a weaker currency would help make imports more expensive, translating to heightened price inflation, the currency has been moving contrary to policy. As evidenced by earlier momentum in the Australian dollar, the effectiveness of accommodation to spur inflation has thus far been limited.

Normally, an accommodative monetary policy decision would be accompanied by a drop in the local currency. In the case of the RBA, no such trend transpired after the monetary policy decision. Following the Central Bank’s move overnight to reduce interest rates to the lowest level on record, bringing the benchmark down to 1.50%, the AUDUSD pair has since trended towards 0.7600.

While the decision met expectations, the Central Bank continues to wage an uphill battle, especially in light of a recent worsening in US economic activity. A poor preliminary second quarter GDP figure from the US showed the slowest pace of annualized growth in years, hurting the probability of an interest rate hike before the end of 2016. In response, the US dollar index basket has fallen also ceding ground to the Australian dollar in another headache for Australian Central Bank officials.

Technically Speaking

Looking at the longer-term trends apparent in the AUDUSD currency pair, it becomes clearer that the prevailing downward trend that has been intact for years could be on the verge of reversing, especially if the US dollar continues its recent losing streak. The pair has been trading within a bearish equidistant channel formation since mid-2012, marking nearly four years of bearish price action.

However, with AUDUSD approaching the upper channel line, any candlestick close above the upper channel line on a weekly candlestick basis will set the stage for an upside breakout in the pair targeting resistance on the upside near 0.8000. While closer resistance sits near 0.7600, if AUDUSD is unable to cross and remain above this threshold, it sets the stage for bearish continuation positions to be established at the upper bound of the pattern to target the lower channel line.

While on a longer-term basis the bias in the AUDUSD pair remains bearish, barring an upside breakout from the channel, on a more interim basis, technical factors are also in support of further upside in prices.

Aside from the moving averages trending higher, with both the 50-day moving average and 200-day moving averages acting as support, an ascending triangle pattern has emerged. The formation, which typically exhibits a bullish bias, is formed by the consolidation of prices between horizontal resistance at 0.7625 and the near-term uptrend begun back in late May. Any candlestick close above resistance should be viewed within the context of an upside breakout, paving the way towards a retest of resistance at 0.7815. However, a move below the near-term upward trend line could be a sign of a breakdown in the breakout formation, signaling renewal of the prevailing longer-term downward trend.

Looking Ahead

The main data in the days and weeks ahead that could reverse the recent wave of appreciation in the AUDUSD pair hinges chiefly on upcoming labor and inflation data. As two of the most important pillars for any potential movement on interest rates, the upcoming US nonfarm payroll figure could significantly add to ongoing momentum higher in AUDUSD if job creation fails to match or beat estimates.

However, in the event that US inflation experiences a sustained pickup and positive trends in unemployment, the US dollar could benefit, helping alleviate upward Australian dollar pressures. By the same token, a sustained drop in Australian fundamentals, namely trade and inflation, could see recent appreciation in the Australian dollar rapidly evaporate. Nevertheless, in the absence of these developments, AUDUSD could very well see itself trend back towards 0.8000 should such circumstances remain elusive.