AUD/USD weekly outlook: RBA, AU employment at the helm

Central Bank meetings will be the key driver for markets this week:

The BOJ, RBA, Fed, BOE and SNB on the roster. And that means volatility is likely to be low on Monday (unless a fresh catalyst arrives) as it is on the eve of the BOJ and RBA interest rate decisions. The same could be said for Wednesday, ahead of the FOMC meeting.

BOJ interest rate decision: Markets favour a hike

There is lot of anticipation over whether the BOJ will finally ditch their negative interest rate policy on Tuesday. Unfortunately, we do not know the time they will announce their decision. But it could certainly prompt some volatility if they surprise with a more aggressive hike or none at all (markets current expect ~60% chance of a 10bp hike to 0%). And that means traders need ot keep an eye on AUD/JPY in particular as it could get caught in the crossfire of the BOJ and RBA.

RBA expected to hold, but will it retain a hawkish bias?

The RBA surprised a few of us by retaining their slightly hawkish bias in their February statement. Inflation is lower, consumer spending and growth are slowing. So what gives? The RBA still think inflation is too high, and they remain reluctant to announce a victory on inflation, particularly when the Fed retain a higher interest rate and it remains unclear as to when they may hike.

And until they remove from the final paragraph of the statement that  “a further increase in the interest rate cannot be ruled out”, the RBA appear set to hold at 4.35%.

Ultimately, the RBA are unlikely to get too dovish too soon. They were the last major central bank to join the hiking party and have the lowest cash rate among the major central banks. If they were to lead the pack and lower rates sooner, they could inadvertently weaken the Australian dollar and import inflation they’re trying to control.

All eyes on the FOMC (particularly the dot plot and press conference)

It is all but a given the Fed will hold rates. Yet markets are still favouring a June cut despite hotter CPI and PPI reports surfacing this week. So next week’s meeting is really about whether the Fed will stick to the three 25bp cuts indicated in the median Fed rate forecast (which would likely be bullish AUD/USD via a weaker US dollar and risk-on appetite), or will they lower the median forecast to  or even 1 cut, send the US dollar higher to weigh on risk and of course AUD/USD.

And Jerome Powell may face some tough questions at the press conference if the median rate is lowered to two cuts, given he told the House Committee that the Fed may be close to discussing cuts ahead of stronger CPI and PPI data.

Australian employment report

This month’s labour force report loses some of its potency, as it arrives two days after the RBA meeting. Still, cracks are slowly widening in the employment figures so a case to easy is gradually building. Unemployment rose to a 2-year high of 4.1% in January, so any advance here simply echoes calls for an earlier cut. Also keep an eye on job growth figures, because a mere 500 jobs were added in January according to the ABS, which does little to make up for the -62.7k figure on December (which was actually -106k full-time, propped u by a rise in part-time jobs).

In case you were wondering how AUD/USD performs in the days around the employment report, we’ve crunched the numbers. Using data since 2007, AUD/USD has averaged positive returns on employment day and negative returns the day after. The three days prior have generated negative average returns.

AUD/USD technical analysis:

The Australian dollar fell for a second day, although its daily range on Friday was roughly half that of Thursday to show bearish momentum is waning. RSI is close to (but not quite at) the oversold level, and the 61.8% Fibonacci is close by for potential support. Given Friday’s ‘bullish’ range for the US dollar index was on Friday the smallest in several years, it further suggests downside potential for AUD/USD could be limited at the beginning of the week. Especially since it closes on its 200-day average on Friday.

Perhaps it can bounce from current levels, although I doubt it will make a break above 66c unless the RBA is surprisingly hawkish of a fresh catalyst arrives. At which point, it will likely be down to the hawkishness of the FOMC meeting as to whether AUD/USD can sustain any early week rally, or simply break below its 200-day MA is a USD rally extends post meeting.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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