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Post-RBA AUD/USD Rebound Stalls as S&P Cuts Rating Outlook to Negative

Australian Dollar Talking Points

AUD/USD tagged a fresh monthly high (0.6208) as the Reserve Bank of Australia (RBA) abandoned the dovish forward guidance for monetary policy, but the recent rebound in the exchange rate appears to have stalled as Standard and Poor’s cuts Australia’s credit rating outlook to ‘negative’ from ‘stable.’

Post-RBA AUD/USD Rebound Stalls as S&P Cuts Rating Outlook to Negative

AUD/USD showed a bullish reaction to the RBA meeting even though the central bank kept the official cash rate (OCR) at the record low of 0.25% as Governor Philip Lowe and Co. tamed speculation for additional monetary support.

Image of RBA interest rate decisions

Source: RBA

It seems as though the RBA will adjust the forward guidance throughout 2020 as the central bank insists that “smaller and less frequent purchases of government bonds will be required” if market conditions continue to improve.

However, the RBA may come under pressure to further support the economy as S&P cuts Australia’s credit rating outlook to ‘negative’ from ‘stable,’ with the agency going onto say that “we could lower our rating within the next two years if the Covid-19 outbreak causes economic damage that is more severe or prolonged than what we currently expect.”

In turn, the RBA may rely on its unconventional tools to combat the weakening outlook for growth as officials emphasize that “the cash rate was now at its effective lower bound,” and the central bank may change its tune over the coming months 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.

With that said, the RBA may sound more dovish at the next meeting on May 5, and AUD/USD may 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 and trades to a fresh monthly high (0.6208), but the string of failed attempts to break/close above the Fibonacci overlap around 0.6190 (78.6% expansion) to 0.6210 (78.6% expansion) may produce range bound conditions as the exchange rate fails to track the upward trending channel carried over from the previous month.
  • Nevertheless, the break of channel support may bring the downside targets back on the radar as a bear flag formation unfolds, and another move below 0.6020 (50% expansion) may spur a more meaningful run at the Fibonacci overlap around 0.5880 (261.8% expansion) to 0.5900 (100% expansion), with the next area of interest coming in around 0.5710 (161.8% expansion).

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong