The Australian dollar versus the US currency demonstrates correctional movement ahead of the upcoming RBA meeting. Last week, the AUD/USD pair hit a fresh multi-week low, reaching 0.7170 (the lower line of the Bollinger Bands indicator on the D1 time frame). However, bears were unable to keep their grasp at 0.71 levels, so they retreated.
Overall, the aussie continues to follow the greenback. Both the downside impulse and the corrective growth in AUD/USD are caused by the behavior of the American currency. Last week the US dollar index tested the level of 94, while today it dropped to 93.76, reflecting the skeptical investors' sentiment. The AUD/USD pair mirrors the trajectory of the index, which, in turn, tracks the greenback's dynamics.
However, the Australian dollar can get a new impulse in the near future. The results of the October meeting of the Reserve Bank of Australia are likely to spark increased volatility in the pair. But the question is whether it will favor AUD or not. The general expectations are pessimistic. Downbeat data on the labor market, a difficult epidemiological situation, protracted lockdowns, and a decline in the cost of iron ore - all these factors may make the RBA keep the dovish stance. Therefore, a bearish scenario will prevail in the market.
At its latest meeting, the regulator postponed the deadline for the next round of revising the bond buyback program. Earlier, the central bank planned to discuss this issue in November, but then this agenda was put off until February 2022. The reason for that is weak economic indicators, especially in the labor market. According to experts, if the labor market does not cope with the coronavirus crisis in the coming months, the regulator may take a wait-and-see approach early next year. The Australian Nonfarms were really disappointing. Among all the components, only the unemployment rate kept afloat.
This is the only component that remained positive as the unemployment fell to 4.5% in August. However, it is a lagging economic indicator, and the report published in September covered the period until mid-August. Other more up-to-date indicators signaled a slowdown in the labor market. For example, the employment growth rate in August declined to 146,000. This indicator went into negative territory for the first time since April this year. The share of the working-age population also decreased to 65.2% from the previous value of 66%.
The epidemiological situation in Australia is also disappointing. Over the past day, more than 1,900 people infected with the Delta strain have been identified in the country. The biggest increase was registered in the densely populated states of Victoria and New South Wales. For comparison, at the beginning of summer, merely 10-30 cases per day were recorded in Australia. Amid the latest tendency, quarantine restrictions remain in place. Lockdowns are planned to be canceled only when 80% of the population is vaccinated. Currently, this number stands at about 70%, so the target level is unlikely to be reached before November. At the same time, the Australian authorities decided to stop paying special benefits related to the pandemic as soon as 80% of the adult population is vaccinated. Residents of New South Wales and Victoria will be the first to face the cancellation of payments, and then the measure will be applied in the Australian Capital Territory. The phased cancellation of benefits for those who lost their jobs due to the pandemic or lost a significant part of their income will begin in mid-October.
Another headwind for the Australian economy is a sharp drop in iron ore prices. Last year, China significantly increased the country's steel production, thus spurring demand for iron ore. For example, a ton of iron ore was estimated at $ 220-230 at the end of spring. But in the summer, China's authorities ordered steelmakers to cut production. One of the reasons for this decision is the tightening of environmental legislation and the aggravation of the political conflict with Canberra connected with the signing of an agreement between the United States, Britain, and Australia on the construction of nuclear submarines. Notably, Australia is the largest exporter of iron ore, accounting for half of the world's exports, while China is the main consumer of Australian iron ore.
In other words, the RBA has no reason to be optimistic and, accordingly, to tighten its monetary policy. Therefore, the results of the RBA meeting are most likely to put the Australian currency under pressure. In any case, the US Federal Reserve System has taken a more hawkish position both in respect to QE, which is to be tapered in November, and the interest rate. The RBA plans to raise the rate no earlier than 2024, while the Federal Reserve does not rule out tightening of monetary policy as soon as next year.
These factors suggest that the current corrective growth can be used as a selling opportunity. At the moment, the AUD/USD pair is testing the resistance level of 0.7290 (the middle line of the Bollinger Bands indicator on the daily chart) amid the weakening of the American currency. If the pair breaks this level, it is likely to rise further to the level of 0.7330 (Kijun-sen line on the same timeframe). Taking into account the current fundamental picture, going long looks risky. It is more reasonable to consider selling at peaks of the corrective growth. Support levels can be found at 0.7240 (the lower boundary of the Kumo cloud on D1) and 0.7170 (the lower line of the Bollinger Bands indicator on the D1 timeframe).
