AUD/USD: Surviving at the 0.6360 key support (for now) but the long-term trend remains bearish

• RBA has shifted to a less hawkish monetary policy stance.
• The interest rate swaps market has started to price in a higher chance of the first RBA interest rate cut to come in February 2025.
• The 2-year and 10-year yield spreads between Australian government sovereign bonds and US Treasuries continued to narrow.
• Growing risk for AUD/USD to stage a major bearish breakdown below 0.6360.

This is a follow-up analysis of our prior report “AUD/USD: “Trump Trade” overshadowed a cautiously hawkish RBA, at risk of further downside” published on 8 November 2024. Click here for a recap.

The price actions of the AUD/USD have tumbled as expected since our last publication and hit the 0.6400/0.6360 major support zone as highlighted. The Aussie dollar was the worst performer among the major currencies as it shed -2.70% against the US dollar based on a one-month rolling basis as of 13 December.

RBA has turned less hawkish

Fig 1: Major trends of 2-year & 10-year yield spreads of AU sovereign bonds/US Treasuries as of 13 Dec 2024 (Source: TradingView, click to enlarge chart)

Even though the Australian central bank, RBA maintained its policy cash rate at 4.35% during its last monetary policy meeting of 2024 on Tuesday,10 December, unchanged for the ninth consecutive time, RBA Governor Bullock has sounded less hawkish now versus her prior press conferences.

During her press conference on Tuesday, she highlighted inflationary pressures had declined in Australia, and RBA officials had also taken notice of the weakness in the private sector of the economy. Hence, it is a dovish tilt that moves in line with the tonality of RBA’s latest monetary statement which stated, “some of the upside risks to inflation appear to have eased”.

The interest rate swaps market has started to price in a higher chance of the first RBA interest rate cut to come in early Q1 next year with a chance of around 70% on a February easing. The RBA is the sole developed nation central that has yet to cut interest rates, other than the Bank of Japan (BoJ) which is an outlier.

In addition, the 2-year and 10-year yield spreads between Australian government sovereign bonds and US Treasuries have continued to narrow and are trading at -0.28% and -0.03% respectively (see Fig 1). These observations suggest that Australia’s fixed-income market is getting less attractive than US fixed-income instruments which indirectly may assert longer-term downside pressure on the AUD/USD.

Bearish momentum remains intact

Fig 2: AUD/USD medium-term& major trends as of 13 Dec 2024 (Source: TradingView, click to enlarge chart)

The price actions of the AUD/USD have continued to oscillate within a medium-term descending channel since its retest on the long-term secular descending trendline resistance from February 2021 swing high on 30 September 2024.

It has broken below a major ascending trendline from the 13 October 2023 swing low and it is now testing the major support at 0.6360 (swing lows of 26 October 2023, 19 April 2024, and 5 August 2024).

In addition, the daily RSI momentum indicator has continued to exhibit bearish conditions which suggests further potential weakness in the price actions of AUD/USD.

0.6560 key medium-term pivotal resistance (also the 50-day moving average), and a break with a daily close below 0.6360 may trigger a multi-week to multi-month impulsive down move sequence with the next medium-term supports coming in at 0.6200 and 0.6130.

However, a clearance above 0.6560 negates the bearish tone for a potential squeeze up to retest the next medium-term resistances at 0.6690 and 0.6810.

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