Wait-and-See RBA to Give Way to Bear Flag Formation

Australian Dollar Talking Points

AUD/USD snaps a four day losing streak ahead of the Reserve Bank of Australia (RBA) meeting, but the interest rate decision may do little to alter the near-term outlook for the Australian Dollar as the central bank is expected to retain the current policy in April.

AUD/USD Forecast: Wait-and-See RBA to Give Way to Bear Flag Formation

AUD/USD attempts to retrace the decline from the previous week, with the exchange rate clearing the series of lower highs and lows, and the RBA meeting may help to prop up the Australian Dollar as the central bank appears to be on track to keep the official cash rate (OCR) at the record low of 0.25%.

Source: RBA

It seems as though the RBA is reluctant to implement a zero interest rate policy (ZIRP) as Governor Philip Lowe and Co. insist that “the cash rate was now at its effective lower bound,” and the central bank may continue to tame speculation for lower borrowing costs as “members had no appetite for negative interest rates.”

In turn, the RBA may merely attempt to buy time as “the term funding scheme and the three-year bond yield target were both significant policy developments that would not have been under consideration in normal times, and the central bank may offer little guidance as Governor Lowe and Co. pledge to purchase Australian government bonds for “as long as market conditions warrant.”

It remains to be seen if the RBA will continue to push monetary policy into uncharted territory as officials rely on their non-standard tools to support the Australian economy, but more of the same from the central bank may do little to influence the near-term outlook for AUD/USD as “it was likely that Australia would experience a very material contraction in economic activity, which would spread across the March and June quarters and potentially longer.

As a result, the recent rebound in AUD/USD may end up being short lived, and the exchange rate may continue to give back the advance from the yearly low (0.5506) as a bear flag formation unfolds.

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AUD/USD Rate Daily Chart

Image of AUD/USD rate daily chart

Source: Trading View

  • Keep in mind, the monthly opening range has been a key dynamic for AUD/USD in the fourth quarter of 2019 as the exchange rate carved a major low on October 2, with the high for November occurring during the first full week of the month, while the low for December materialized on the first day of the month.
  • The opening range for 2020 showed a similar scenario as AUD/USD marked the high of the month on January 2, with the exchange rate carving the February high during the first week of the month.
  • However, the opening range for March was less relevant, with the high of the month occurring on the 9th, the same day as the flash crash.
  • With that said, the rebound from the yearly low (0.5506) may continue to evolve as AUD/USD snaps the series of lower highs and lows from the previous week, with a move above the April high (0.6185) raising the scope for a larger recovery in the exchange rate.
  • Nevertheless, the string of failed attempts to close above the Fibonacci overlap around 0.6190 (78.6% expansion) to 0.6210 (78.6% expansion) along with the break of channel support may bring the downside targets back on the radar as a bear flag formation unfolds, with the close below 0.6020 (50% expansion) opening up the 0.5880 (261.8% expansion) to 0.5900 (100% expansion) region.
  • Next area of interest comes in around 0.5710 (161.8% expansion) followed by the 0.5520 (61.8% expansion) area, which largely lines up with the yearly low (0.5506).

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— Written by David Song, Currency Strategist

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