In Australia, the confrontation between investors and the Reserve Bank is gaining momentum. The former are convinced the monetary policy easing will start in 2024, but the central bank insists they are wrong. Let’s discuss this topic and make a trading plan for the AUDUSD pair.
The article covers the following subjects:
Highlights and key points
- The derivatives market predicts a decline in the Australian cash rate in 2024.
- The return of carry trades is the main driver of the AUDUSD rally.
- Short trades can be opened if the pair falls below 0.661 or rebounds from 0.6645 and 0.6685.
Weekly Australian dollar fundamental forecast
RBA Governor Michele Bullock stated that the central bank was monitoring the potential for a resurgence in inflationary pressures. She stressed that it was premature to contemplate a reduction in the cash rate, noting that market expectations of monetary policy easing were misguided. Nevertheless, investors are still anticipating the start of the monetary expansion cycle in 2024, which has led to the perception that the AUDUSD rally may be relatively short-lived.
It is not uncommon for markets to be incorrect in their predictions. However, if they are proven to be inaccurate, it is likely that there will be significant fluctuations. In August, market participants were encouraged by the slowdown in US inflation and the dovish reversal of the Reserve Bank of New Zealand, which had previously also stated that it was premature to consider rate cuts. As a result, the probability of the RBA initiating monetary expansion in November is a coin flip, while there is a high degree of confidence that rate cuts will occur in December.
RBA cash rate and inflation
Source: Bloomberg.
Michele Bullock and her team are understandably exercising caution. Australian employment in July saw a significant increase of 58.2K, with wages in the second quarter rising to 4.1%. These figures have exceeded Bloomberg experts’ forecasts. A robust labor market has enabled the Reserve Bank to anticipate the return of inflation to the target range of 1-3% by the end of 2025 without the need to hastily adjust monetary policy. Compared to other central banks, its measured approach creates a favorable environment for Australian businesses.
Australian inflation rate and wages
Source: Bloomberg.
The Australian dollar is supported by an improving global risk appetite, driven by a seven-day rally in the Nasdaq-100 and a return of investors to the carry trade. This trading strategy allowed speculators to make a quick profit, but it was abandoned during Black Monday due to the strengthening of the yen. Since then, the Japanese currency has weakened by 5%, and traders have adopted the old proven schemes. So much the better for such a profitable currency as the aussie.
Aussie and pound against yen
Source: Bloomberg.
Meanwhile, let’s not forget about global economic trends. Inflation declines all across the globe, not only in the US. This tendency will definitely be echoed in Australia. The RBA’s monetary tightening measures are slowing the economy and will continue to cool the labor market. Consequently, there will come a point when Michele Bullock and her colleagues will be forced to launch a monetary expansion cycle.
As the US presidential election approaches, market volatility will likely surge, leading to a reversal of the carry trade and a decline in global risk appetite. Furthermore, if Donald Trump becomes president, the Chinese yuan and its proxy currencies are poised to face significant challenges in the Forex market.
Weekly AUDUSD trading plan
In light of these factors, it is evident that the AUDUSD rally is short-lived. Therefore, consider selling the pair once it returns below 0.661 or fails to pierce the resistance levels of 0.6645 and 0.6685.
Price chart of AUDUSD in real time mode
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