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AUD/USD Snaps Upward Trend as RBA Cuts Growth & Inflation Forecast

Australian Dollar Talking Points

AUD/USD tumbles to fresh monthly lows as the Reserve Bank of Australia (RBA) adopts a dovish forward-guidance for monetary policy, and the rebound following the currency market flash-crash may continue to unravel as both price and the Relative Strength Index (RSI) snap the upward trends from earlier this year.

AUD/USD Snaps Upward Trend as RBA Cuts Growth & Inflation Forecast

AUD/USD quickly reverses course ahead of the December-high (0.7394) as Governor Philip Lowe warns that the interest rate outlook is ‘much more evenly balanced,’ and it seems as though the RBA is in no rush to lift the official cash rate (OCR) off of the record-low as the central bank head warns ‘it is possible that the economy is softer than we expected.’

Image of RBA forecast

It seems as though the RBA will continue to tame bets for higher interest rates ahead of the next meeting on March 5 as the updated Statement on Monetary Policy shows a downward revision in the growth forecast, with the economy now expected to expand 2.5% for the year through June 2019 versus an initial forecast for a 3.25% rate of growth. Economic activity is expected to edge higher in the year through June 2020 as the growth rate is expected to increase 2.75%, but the fresh update compares to earlier projections for a 3.25% expansion.

The RBA’s inflation outlook was also revised lower, with ‘forecasts for underlying inflation have been revised slightly lower, reflecting somewhat lower growth and expected near-term weakness in administered and utilities price inflation, and the updates suggest Governor Lowe & Co. will preserve the record-low cash rate throughout 2019 as the board ‘does not see a strong case to adjust the cash rate in the near term.’ With that said, the AUD/USD flash-crash rebound may continue to unravel even though the Federal Reserve drops the hawkish forward-guidance for monetary policy as the RBA shows a greater willingness to further support the economy, but the recent pickup in volatility appears to be shaking up retail interest as traders ramp up their net-long exposure.

Image of IG client sentiment for audusd

The IG Client Sentiment Report shows 64.9% of traders are net-long AUD/USD compared to 47.4 % last week, with the ratio of traders long to short at 1.85 to 1. The number of traders net-long is 3.1% higher than yesterday and 50.2% higher from last week, while the number of traders net-short is 5.8% higher than yesterday and 24.2% lower from last week.

Profit-taking behavior may account for the drop in net-short interest as AUD/USD slips to fresh monthly lows, but a further accumulation in net-long exposure may offer a contrarian view to crowd sentiment especially as both price and the RSI snap the upward trends from earlier this year. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups.

AUD/USD Daily Chart

Image of audusd daily chart

  • Topside targets are no longer on the radar for AUD/USD as the flash-crash stalls at the 200-Day SMA (0.7498), with the exchange rate at risk for further losses as the exchange rate carves a series of lower highs and lows.
  • In turn, a close below the 0.7090 (78.6% retracement) to 0.7110 (78.6% retracement) region raises the risk for a move towards 0.7020 (50% expansion), with the next downside area of interest coming in around 0.6950 (61.8% expansion).

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— Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.

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