AUD/USD – Aussie Rally Continues as RBA Holds Rates

The Australian dollar has edged higher on Tuesday, as the pair trades at 0.7360 line early in the North American session. On the release front, the RBA maintained rates at 1.75%. AIG Construction Index dipped to 46.7 points, pointing to contraction in the construction sector. Later in the day, Australia releases Home Loans. There are no major releases out of the US on the schedule.

As widely expected, the RBA held interest rates on Wednesday at 1.75%. The RBA lowered rates in May by a quarter point, from 2.00% to 1.75%. Inflation remains low and the RBA has sent clear messages to the markets that it expects to lower rates, but the markets did not expect a move in June for two reasons. First, a national election has been called for July 2, and the RBA will likely want to avoid any major moves during an election campaign. As well, a strong GDP report for the first quarter has given the RBA some breathing room. GDP expanded 1.1%, well above the estimate of 0.6%. The solid reading was credited to a strong increase in exports to China and higher consumer spending. This marked the strongest GDP report since 2014. Market focus will now turn towards the RBA’s August policy meeting, the first meeting after the election.

With a rate hike from the Fed up in the air, a speech from Fed Chair Janet Yellen on Monday was closely watched by the markets. Speaking at the World Affairs Council in Philadelphia, Yellen said she remained optimistic about the US economy and hinted that the Fed would raise interest rates, but crucially, she gave no indication as to when that might occur. This omission was in sharp contrast to her remarks just over a week ago, when she declared that a hike would likely be appropriate “in the coming months”. Yellen was cautious in her tone on Monday, saying “[i]f incoming data are consistent with labor market conditions strengthening and inflation making progress toward our 2 percent objective as I expect, further gradual increases in the Federal Funds Rate are likely to be appropriate”.  Yellen played down the dismal Nonfarm Payroll report, saying that the markets shouldn’t attach too much significance to one soft report. The markets had lowered expectations for a June rate hike, and Yellen’s speech has all but priced out a June move. However, a rate increase in July or September remains on the table, and any decision by the Fed to raise or maintain rates will be data-dependent, particularly inflation and employment data.

The currency markets wrapped up last week with strong volatility, courtesy of a dismal Nonfarm Payrolls report. The April release plunged to 38 thousand, stunning the markets. This was the lowest reading since August 2010. The estimate stood at 159 thousand, which was almost identical to the previous release. The US dollar took a beating on Friday, and the Aussie took full advantage, gaining 130 points. The unexpectedly soft release dampened expectations for a June hike. Some of the plunge in the NFP release was attributable to a strike by workers at Verizon, a major communications company. Still, even without this component, the indicator would have posted a gain of only 72,000, well short of expectations. In other US employment news, Average Hourly Earnings, which measures wage growth, posted a weak gain of 0.2%. The unemployment rate fell to 4.7%, but workforce participation dropped to 62.6%.

AUD/USD Fundamentals

Monday (June 6)

• 19:29 Australian AIG Construction Index. Actual 46.7 

Tuesday (June 7)

• 00:30 Australian Cash Rate. Estimate 1.75%. Actual 1.75%
• 00:30 Australian RBA Rate Statement
• 8:30 US Revised Nonfarm Productivity. Estimate -0.6%
• 8:30 US Revised Unit Labor Costs. Estimate 4.0%
• 10:00 US IBC/TIPP Economic Optimism. Estimate 49.1
• 15:00 US Consumer Credit. Estimate 19.1B
• 21:30 Australian Home Loans. Estimate 2.6%

*Key releases are highlighted in bold

*All release times are EDT

AUD/USD for Tuesday, June 7, 2016

AUD/USD June 7 at 6:45 EDT

Open: 0.7372 Low: 0.7358 High: 0.7450 Close: 0.7440

AUD/USD Technical

• AUD/USD posted gains in the Asian session and the upward movement has continued in European trade
• 0.7339 has some breathing room in support following gains by AUD/USD in the Tuesday session
• 0.7472 has weakened as a resistance line
• Current range: 0.7339 to 0.7472

Further levels in both directions:

• Below: 0.7339, 0.7251 and 0.7160
• Above: 0.7472, 0.7612 and 0.7339

OANDA’s Open Positions Ratio

AUD/USD ratio is almost unchanged on Tuesday. Long positions command a strong majority (61%), indicative of trader bias towards AUD/USD continuing to move higher.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.