RBA Saves Aussie from Nosediving. Forecast as of 07.08.2024


Markets managed to recover from severe turbulence. Yesterday’s winners have become losers and vice versa. Notably, the RBA’s intention to maintain the rate at 4.35% for at least six months supported the AUDUSD pair’s upward movement. Let’s discuss this topic and make a trading plan.

The article covers the following subjects:

Highlights and key points

  • Central banks react to panic in financial markets.
  • The RBA argues that investors are wrong.
  • The withdrawal from carry trade transactions is still ongoing.
  • Short trades can be opened if the AUDUSD falls below 0.654.

Weekly Australian dollar fundamental forecast

While the Fed demonstrated exemplary composure in the face of the Black Monday events, other central banks were less calm. Bank of Japan Deputy Governor Shinichi Uchida stated that the regulator did not intend to raise the overnight rate as long as financial markets remained unstable. Reserve Bank of Australia Governor Michele Bullock stated that the cash rate would remain at 4.35% for the following six months.

The impact of market turmoil on the US dollar and carry trade-related currencies differs significantly. While the greenback experienced a brief decline, the yen skyrocketed by 13%, and the Australian dollar tumbled by 6.6% from its July highs. The closure of trades amid concerns about a potential recession in the US and the tightening of monetary policy by the Bank of Japan led to a significant shift in the Forex market.

Efficiency of carry trade strategy

Source: Bloomberg.

It is worth considering whether central banks will maintain their stance. Neither the BoJ nor the RBA want to see such fluctuations in their currencies. Therefore, the RBA opted to maintain the key rate at 4.35% and asserted that market pricing was inaccurate. Investors anticipate a loosening of monetary policy before the end of the year, while RBA officials intend to maintain cash rates unchanged for at least another six months.

Australia was one of the laggards in the monetary restriction cycle, having not yet raised borrowing costs to the same extent as other countries. The RBA has indicated that it will continue to fight inflation by raising its CPI forecast to 3.5% by the end of 2024. This approach has been viewed as a positive for the AUDUSD pair, allowing its quotes to recover from a Black Monday crash amid the unexpectedly rapid recovery of Chinese imports by 7.2% in July.

Inflation rate in Australia and other countries

Source: Bloomberg.

Has the Australian dollar’s losing streak reached an end? Most experts believe that it is far from over. JPMorgan estimates that only 50-60% of carry trades have been completed to date. With the yen still undervalued, this figure is likely to fall further, curtailing the number of trades that can be completed. This is unfavorable news for currencies with higher yields, such as the Australian dollar and the Mexican peso. Furthermore, demand for the Japanese currency may increase as Japanese investors start to hedge currency risks again.

The futures market’s overestimation of the scale of the Fed’s monetary expansion will exert pressure on the AUDUSD pair. At the peak of Black Monday, the estimated scale was 125 bps until the end of 2024. However, it fell to 105 bps. Furthermore, the odds of a 50 bp cut in the federal funds rate in September fell to 63% from 85%.

Weekly AUDUSD trading plan

Most likely, the AUDUSD correction will conclude earlier than the downtrend reverses. Therefore, a pullback from the resistance levels at 0.658 and 0.61, or the pair’s descent below 0.654, could be considered a selling opportunity.

Price chart of AUDUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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