The Reserve Bank of Australia has a monetary policy meeting this evening . While the central bank is widely expected to keep interest rates unchanged, the Australian dollar is the best performing currency this year and its strength could worry the RBA. Since Jan 1, AUD is up more than 5.5% versus GBP, more than 4.5% versus USD and CAD, and over 4% versus EUR, NZD and Chinese Yuan. As shown in the table below, there have also been areas of weakness. Labor market conditions in particular deteriorated significantly at the start of the year, inflation expectations have fallen, service sector activity slowed, parts of the Chinese economy is losing momentum and the trade balance shrank significantly. Yet commodity prices are on the rise, retail sales and consumer confidence is up and manufacturing activity remains strong. Prior strength is beginning to fade and the RBA will need to decide whether the outlook is murky enough to emphasize the headwinds created by a strong currency. Last time they met they were upbeat but we expect less optimism this month. If we are right, AUD/USD could make a run for 75 cents.
Technically, there’s a significant amount of support between 0.7500 and 0.7530 whereas AUD/USD near term resistance is at Monday’s high of 0.7610. If AUD/USD breaks above 0.760, it should run up to the 20-day SMA near 0.7650. However if it falls, we expect the currency pair to drop to at least 0.7530 and whether 75 cents is taken out depends on the degree of RBA dovishness.
