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Following the release of minutes from the RBA’s February meeting, it appeared that AUDUSD bulls could benefit from divergence in monetary policy. However, they did not rejoice for long. Let us discuss this topic and make up a trading plan.
Monthly Australian dollar fundamental forecast
While the entire financial world is waiting for signals about the start of monetary expansion, RBA officials surprised everyone with the statement that the cash rate could be increased. Their hawkish stance, positive signals from China, and the US dollar losing its advantage in the form of a convergence of market expectations for the federal funds rate with FOMC forecasts allowed the AUDUSD bulls to go ahead.
Michelle Bullock was forced to explain the RBA’s hawkish statements to parliament. Australian central bank cannot know how events will develop, so it has not ruled out the possibility of an increase in the cash rate. Monetary policy continues to be data-driven. The previous rate of consumer price growth of 3.4% in January, the same as in December, and the slowdown in core inflation from 4.2% to 4.1% cooled the hotheads of AUDUSD buyers. Bloomberg experts expected higher figures, but the disinflationary process continues.
Dynamics of cash rate and inflation in Australia
Source: Bloomberg.
As a result, the derivatives market raised estimates of the expected scale of the RBA’s monetary expansion, which, together with changes in investor views on the future of the Fed funds rate, brought the AUDUSD bulls back to earth. FOMC officials are saying there is no need to ease monetary policy any time soon, and are forecasting its start in late 2024. That estimate is later than the CME derivatives forecast for June.
Dynamics of the expected rate cuts by the RBA and the Fed
Source: Bloomberg.
The Aussie has been pressured by an 8% drop in iron ore prices since the Chinese economy reopened after the Lunar New Year holidays. This metal serves as an indicator of the health of the Chinese economy, primarily in the problematic real estate sector. At the same time, a decrease in its cost is negative for Australian producers and foreign trade. It is not surprising that the AUDUSD downtrend has begun again.
If the American economy continues to strengthen, the risks of a new inflation high will increase. This will force the Fed to hold rates longer than markets expect and will support the US dollar. Greenback will take advantage of its status as a profitable currency and continue to strengthen due to American exceptionalism. Moreover, escalating geopolitical tensions in Eastern Europe, the Middle East or Asia and the US presidential election will increase the popularity of USD as a safe-haven asset.
Monthly AUDUSD trading plan
Aussie has very little chance. It is unlikely that the RBA will resume its rate hike cycle. Chinese data is once again disappointing, which has a negative impact on the commodity market and commodity currencies. Although the AUDUSD correction turned out to be deeper than I expected, the correction allowed traders to enter trades at a higher price. I recommend holding short trades with the same targets at 0.639 and 0.6325.
Price chart of AUDUSD in real time mode
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