The Australian dollar (AUD) has been one of the standout performers on major forex in recent weeks. However, it may now be time for a bit of a retracement. Profit-taking is setting in this morning as a double whammy of factors hit the AUD. A rate cut from the People’s Bank of China (PBoC) and the minutes from the Reserve Bank of Australia (RBA) have combined to drive AUD lower.
- The AUD has outperformed since a surprise rate hike by the RBA
- A smaller-than-expected rate cut by the PBoC and less hawkish RBA minutes
- Pullbacks are taking hold on AUD crosses
AUD gains driven by the RBA rate hike
The RBA shocked markets a couple of weeks ago with a surprise rate hike. The consensus was not expecting one, but a +25bps hike to 4.10% (an 11-year high) came with the warning that further tightening may be needed to pull inflation back towards its target.
The AUD has been a consistent outperformer pretty much ever since. This has helped the AUD from being one of the worst-performing major currencies at the beginning of June, to the best.
However, the performance has been tailing off in the past couple of sessions and has now turned sharply lower this morning.
A double whammy of punches hit the near-term outlook
The catalyst for a correction on the AUD has come from two factors, both overnight in the Asian session.
Over recent weeks, the market chatter about potential stimulus measures from China has been mounting. Chinese economic data has been disappointing recently, with lower than expected official PMI, much weaker than expected exports, the PPI inflation falling further into negative and weaker than expected industrial production and retail sales. The run rate of Q2 growth is currently close to zero. This will not be playing well with a Chinese Government that is looking for a GDP target of around 5% this year. Surely stimulus measures will be coming.
However, this morning’s PBoC interest rate decision was disappointing. A rate cut of just -10bps to the 1-year Loan Prime Rate (to 3.55%) has underwhelmed markets that had been hoping for more. Now, of course, there could be more measures in the pipeline, but for now, this is weighing on risk assets such as the AUD.
The AUD has also been hit this morning as the minutes from the June RBA meeting. The decision to hike rates in June was “finely balanced”. This suggested that the move to hike was only marginal, with concerns over slowing consumer spending. Concerns over inflation not returning to the 2%]to 3% target band in a “reasonable timeframe” tipped the balance for the rate hike.
However, with the decision only just edging towards a hike, this may leave AUD traders slightly more conservative in pricing for further hikes. The yield on the Australian 10-year Government bond has fallen about -10 basis points since the RBA minutes were released.
Time for a retracement on AUD?
The AUD is a significant underperformer on major forex this morning. The move is impacting the outlook on several AUD crosses. One key pair that I have discussed previously is the move lower on EUR/AUD amid the hawkish perception of the RBA and the concern that the ECB may not hike as much as it is leading markets to believe. However, there is a retracement taking hold now as there is a shift in perception of just how hawkish the RBA might be too. EUR/AUD is rebounding decisively this morning. Technical analysis shows that this move is a retracement within a near two-month downtrend channel, but also is a pullback to the neckline of a big top pattern too. The neckline resistance is between 1.6130/1.6190 and market reaction to this resistance will be an important near-term gauge, as will the Relative Strength Index unwinding towards 50. If the neckline holds as resistance, then it is likely that this near-term slip in the AUD may prove to be another chance to sell EUR/AUD. However, a break above the neckline would suggest a larger move back towards the channel resistance again (currently around 1.6365).
Another AUD pair that I will be watching is AUD/USD. The pair has dropped back to the breakout support of the old highs around 0.6783/0.6818. It took several months for this breakout to develop but this should be a basis of underlying support now. However, technically, with the RSI back around 60, there is more room for the unwind to develop. A close below 0.6783 would bring 0.6710/0.6720 as the next support area in the retracement. This move will be an important test for the strength of the AUD going forward.
