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Forex Analysis:::2020-08-14

AUD/USD. Trade recursion: sell on growth to buy on declines

Yesterday's data on the growth of the Australian labor market did not make any impression on traders of the AUD/USD pair. The release was quite controversial, despite the fact that many of its components were better than the forecast values. But, firstly, experts' expectations were too pessimistic (therefore, the release was in the green zone), and secondly, the structure of the main indicators show the uneven recovery of the labor market, reflecting the existing problems in this area. In addition, the release covers a 2.5-week period last month, so yesterday's figures did not reflect the impact of a lockdown in Australia's largest state, Victoria. Therefore, the July release did not cause positive emotions either among traders or the head of the Reserve Bank of Australia, Philip Lowe, who was in a video conference with the parliamentary committee during the Asian session on Friday.


According to him, the coronavirus outbreak in Victoria will slow down the recovery of the Australian economy. According to updated forecasts, the second quarter will show a 7% decline in the country's GDP, which is "the largest decline in many decades." As Lowe noted, the first signs of recovery in the Australian economy can only appear in the fourth quarter, unless the situation with the coronavirus worsens.

Speaking before the Australian House of Representatives, RBA Governor Philip Lowe also assessed the inflation outlook. According to him, inflation is unlikely to return to the target two-percent range for "at least three years". This means that interest rates will remain at the current level for a given period of time, and if they are revised, then only in the direction of their reduction.

However, Lowe did not talk about easing monetary policy in the foreseeable future: he rather made it clear that the issue of raising the rate will not be on the agenda in the coming years - at least until there was a shift towards "full employment" inflation was sustainably back within the RBA's 2 to 3 percent inflation target band. According to him, these conditions are unlikely to be met for at least three years.

In addition, Lowe complained that Australian consumers have changed their attitude to spending - households and businesses have become more cautious in terms of consumption and investment. Such trends have a negative impact on both inflationary processes and the processes of recovery of the labor market. Lowe reiterated his forecast that the unemployment rate will only rise in the coming months, and will reach 10% by the end of the year (the July release reflected an increase in the rate to 7.5%).

Lowe's rhetoric was pessimistic, but expected. Therefore, AUD/USD traders were cool-headed about his speech in Parliament, although the aussie was under pressure during the Asian session on Friday.

Chinese data also played a role, reflecting worrying trends. The latest industrial production indicator remained at the June level (4.8%), while most experts predicted its growth to 5.5%. Retail sales were completely disappointed: the indicator remained in the negative area (-1.1%), although many analysts were confident that this indicator would exceed the zero level.

Thus, the aussie is under the yoke of many fundamental factors: the dovish rhetoric of the head of the RBA, ambiguous macroeconomic reports of Australia, weak Chinese reports and strained relations between Canberra and Beijing. In such conditions, it is only possible for the AUD/USD pair to grow in case there is a large-scale weakening of the US currency. But the dollar index has recently shown multidirectional dynamics, fluctuating within the 93rd figure.


In fact, the aussie is also pressed: the AUD/USD pair has been trading within the 0.7080 range (Kijun-sen line on the daily chart) - 0.7220 (the upper line of the Bollinger Bands indicator on the same timeframe) over the past three weeks. These are the boundaries of the established price band, while the pair is stuck in the frame of the 71st figure. The aussie does not have its own arguments for conquering the 72nd price level, while the vulnerability of the US currency allows traders to enter purchases when it falls to the lower border of the above range. This means that the straightforward trading strategy of opening longs on downward turns and shorts on rallies has still not lost its relevance.

The macroeconomic calendar is not entirely empty today: data on US retail sales will be published (a significant decline is expected after a two-month growth) at the beginning of the US session. If the greenback reacts negatively to this release, it will be possible for AUD/USD traders to enter sales at a better price, especially if the aussie approaches the borders of the 72nd figure.

Irina Manzenko
Analyst InstaForex
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