The Australian dollar has been on a fairly steady downturn for the past 2 months and as the release of Australia’s interest rate decision nears, we’re about to find out how it will affect our currency. Against many other currencies, the AUD/USD is looking strong, but with the RBA’s stance on keeping rates unchanged this time around and what Brexit means for global sentiment in general, there may be more downside in store. This article takes a look at what some experts have predicted could happen to our currency ahead of this week’s Reserve Bank of Australia (RBA) meeting. I will then look at some charts showing the current USD/AUD cross and some technical setups that could show more downside to come.
Fed and RBA decisions ahead
Though not expected to be as dramatic as other currency pairs, the AUD/USD pair has been seeing some pretty big moves already. The pair dropped more than 1% over the last week but held relatively steady over the weekend. On July 2nd, Fed meets again to decide its future monetary policy outlook, and possibly more so than any other market movement could push the AUD/USD down. With no change in interest rates by either party, there is simply no incentive for investors to dump risk in the dollar when there is very little economic downside otherwise. As such, we could see a lot more upside in exchange rates ahead of this decision.
#AUDUSD SSI is at 1.96
Risk Warning: Losses can exceed deposits.
Disclaimer: Past performance is not indicative of future results. pic.twitter.com/yYz5FtwZ2B— FXCM Market Data (@FXCM_MarketData) July 4, 2022
The RBA on the other hand is a bit of an unknown entity when it comes to its outlook. While it’s expected that interest rates will remain the same, the AUD/USD tends to tank right after these meetings 1). This can be attributed to what many people call “the carry trade”. That’s not to say that this is always a good idea though, but in addition to any risk incurred by leveraging in the carrying trade, other factors make it less appealing. One of which is that Australia has resorted to negative interest rates and while this wasn’t a concern back when they were introduced initially, it’s now looking like more countries will follow suit.
AUD/USD forecast
To try to predict where this pair is going to end up by the end of the month I will look at some forecasts. The first one comes from commodity broker Noble Group who predicted that if the AUD/USD declined to $0.75, it would make the commodity investment firm “a top-5 trading firm in the Asia Pacific”. Not nearly as dramatic as others, but still a forecast that could have some merit going into this week’s meeting. Commodity traders aren’t necessarily experts in world affairs and their bias can be seen as more speculative rather than technical here. But it’s still something to keep an eye on as it doesn’t directly affect our currency.
The latest forecast comes from ING who, as of now, places their expected AUD/USD in the $0.88-$0.90 range by the end of year 2). I’ll get more into this forecast in how it’s not too far off from other forecasts earlier 3), but it also has a comment that is quite contrary to what many forecasters believe will happen. Knowing that there will be an agreement to maintain rates at 1.50% and that there has been no indication of any change for some time, it becomes harder to predict where this pair is going to go ahead of our next meeting.
What will the Aussie dollar do after this week’s RBA meeting?
While it’s hard to predict what will happen after the RBA meeting, there are a few things that I feel could play out in this week’s session. The AUD/USD will likely fall even further in anticipation of no change in rates, but what happens post-meeting is harder to predict. If the Australian dollar is not devaluing as much as expected, it could push it higher until new information comes to light or until we reach a top.
However, I do feel that to some degree the market knows what is likely to happen and it’s likely part of the reason that we see relatively little movement right now. The Aussie dollar has had a pretty steady decline in the past month and even though a further decrease could be expected, it’s possible that at least for now investors are holding off on selling as much as possible before there is more confidence that our currency will not fall much further.
