The Australian dollar has move 120 pips (1.2 cents) higher against the USD since it bottomed on Friday night, pushed along by a temporary reversal in sentiment against the super-strong USD as the Federal Reserve starts pulling the rate rise lever next month.
So of course, the “trading” economists are now pushing for a higher Pacific Peso based on this not-unusual-at-all intramonth volatility, whereas the bigger picture suggests the Aussie is likely to head further below 70 cents as the RBA plays catchup.
At yesterday’s meeting (the first one since December), the RBA announced an end to its QE program and continues to sit on its hands with record low interest rates with a pledge to “not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range.” The problem with that is as the Federal Reserve rapidly raises rates (with large jumps – not just 0.5% incremements – on the table) and imported inflation rises, putting a dampener on retail sales and sentiment, it maybe caught between a rock and Martin Place in enacting its own “normalisation” of rates.
ANZ shows the current path of expected changes in rates, which is still quite anemic compared to the FOMC, with an end of year interest rate setting of 0.75% at most:
But what if the Fed lifts rates to 0.75% next month? And then three or more before June? The interest rate differential will blow out faster than a Scott Morrison handshake:
The long term setup on the weekly AUDUSD chart is suggesting a very large and discernable bearish head and shoulders pattern, with the neckline at the key 70 cent level:
Note the weekly trendline from the 2021 highs is nowhere near under threat from this latest bounce. Today’s speech by Governor Lowe will be closely listened to see how the RBA can shore up the waves of AUD depreciation when the hawkish Fed runs away with the rate level.