AUD/USD is edging closer to 0.78, the highest levels since June 2015 – a 10 month high. Markets have clearly rebounded from the Doha Disappointment and this favors risk currencies such as the Australian dollar, which has held its ground nicely when oil prices were sliding and was well positioned for a rally immediately afterwards.
But taking a step back from uptrend in black gold, are current levels justified? Here are 5 reasons to fade the rally in AUD/USD:
- RBA doesn’t like it: The meeting minutes from the Reserve Bank of Australia show some discomfort with the strength of the currency. They even connect between the “appropriate” loose monetary policy and the higher value of the A$. Are more rate cuts in the pipeline? In any case, it “complicates” economic re-balancing and weighs on inflation. It seems that the rhetoric is slightly stronger than beforehand.
- Iron prices depressed: Australia’s key commodity export, iron ore, is set to remain depressed in price according to analysts which just see too much supply, not enough demand. Iron producers have been unable to agree on any kind of concerted action, similar to OPEC’s inability. This does not bode well for the Aussie.
- Election uncertainty: Australians are set to go to the polls on July 2nd, according to news coming out from the Prime Minister. These will be dual elections for both houses of parliament. Given the frequent change in Australian heads of state, the dual elections add an additional layer of uncertainty. Also here, uncertainty should result in weakness of the currency, not strength.
- Oil rebound fading: While the reaction to the failure of the OPEC-Non-OPEC meeting was very modest, the recovery from the fall has been very modest. WTI Crude Oil is still struggling with the $40 mark. The fundamentals haven’t changed too much: not enough demand and with all due respect to the Kuwaiti strike, there is too much supply.
- Not too dovish Fed?: While messages from the US central bank have been mixed, the Boston Fed’s known dove Eric Rosengren made very explicit comments: saying that wages are picking up and that the Fed will raise rates more than “pessimistic” investors think. In its April meeting next week, will the Fed hint about a rate hike in June? Currently it seems a bit stretched, but things are not too shabby, and that’s coming from a dove.
Here is the AUD/USD chart. The next line of resistance is at 0.7840, followed by 0.79 and 0.80. On the downside we have 0.7750, 0.7640, 0.76, 0.7530 and 0.75.
