AUD/USD started today on the backfoot following yesterday’s failed push above parity. The failure was rather spectacular with price forming an Evening Star bearish reversal pattern under 1.00, rebounding off the descending Kumo and also failing to even test Monday’s interim ceiling slightly above 1.00.
Hence it was no surprise that prices took a nose dive from a technical perspective. S&P 500 also had a strong day, gaining 1.01% and closed above the 1,650 level which pushed USD higher. Price went lower with no replies from bulls until early Asian trade today, which brought levels back above 0.99. However the move above 0.99 proved to be temporary, with price collapsing greatly, losing the entirety of this morning’s gains following lower wages data from Australia. Wage Cost Index came in lower than expected Q/Q, printing a 0.7% gain vs 0.8% anticipated. Y/Y didn’t meet expectations either, coming in at 3.2% vs a 3.3% forecast.
The figures do not look half bad though, as the increment is just under expectations, with the actual growth still relatively healthy. The Y/Y growth of wages is still higher than the Y/Y inflation rate, which is certainly good and suggest that consumer consumption rates should not fall, which will allow inflation rates to remain healthy, especially since employment figures continue to rise. Hence the sharp decline brought on by the “negative” news is a sign that overall bearishness in market towards AUD/USD is extremely high. Bears are finding every single flimsy reason to sell, which will allow price to test the recent swing low around 0.9875 and potentially lower.
Daily chart shows a Dragonfly Doji 1 day ago following the 3 Black Crows pattern. With a long bearish maribozu forming right now, there is a likelihood that the Doji can be interpreted as a Point of Inflexion, suggesting that bears may enjoy further extensions below, potentially heading towards 0.96-97 – the swing lows found in 2012.
Fundamentally, the Aussie dollar will be looking weaker in the short term after latest budget announcements revealed that previous forecasts for Government revenue have been overly optimistic. It is worth noting that prices were already under parity before the budget announcement, fueled by RBA’s recent rate cut and a stronger USD. Hence it is not surprising to see bearish acceleration from the technical side following the point of inflexion. However, part of the decrease in Government revenue was attributed to the high AUD/USD, which was placed at $1.03. A 3% decline (or perhaps more) will certainly help subsequent quarter’s incoming revenue, which will help to keep AUD/USD afloat in the longer term. As such, do not expect AUD/USD to fall back to pre 2008 levels of around 0.60 based on this alone. The rate differential between AUD and USD will also go a long way to ensure that price will remain buoyant.
If RBA wants to bring AUD down for an extended period of time, it will need to do much more to reduce the current 2.5% difference in yields for holding AUD versus the Greenback.
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