AUD/USD – Aussie Steady as RBA Holds Rates

The Australian dollar has posted small losses on Tuesday, as AUD/USD is trading at the 0.75 line. In economic news, it was a busy day in Australia. The RBA held the benchmark rate at 1.75%. Retail Sales posted a small gain of 0.2%, short of the forecast of 0.3%. There was better news as Australia’s trade deficit narrowed to A$1.72 billion, beating expectations. In the US, today’s highlight is Factory Orders. We’ll also hear from FOMC Member William Dudley. On Wednesday, the Federal Reserve will release the minutes of its June policy meeting.

As expected, the RBA stood pat on Tuesday, maintaining the benchmark rate at 1.75%. The markets had not anticipated any monetary moves, as Australians went to the polls just last week. The election remains inconclusive and it may take several more days of political jockeying before a new government takes shape. Back in May, the RBA lowered interest rates following a poor CPI reading in the first quarter. Analysts are keeping a close eye on July 27, when CPI for Q2 will be released. The RBA will meet one week later, and a poor CPI release could be the catalyst for a rate cut. Retail Sales, the primary gauge of consumer spending, did not impress. The indicator posted a gain of 0.2% in May, unchanged from the previous reading.

Market focus on whether the Federal Reserve would raise rates has understandably shifted to the back-burner since the Brexit vote in late June. The historic referendum has had economic repercussions across the globe, including the US. What will be the effect of Brexit on US monetary policy? It may be too early too tell, but some analysts have said that the Fed might change stance and actually lower rates this year. The markets will be keenly interested in the Fed minutes, which will be released on Wednesday, although they will have preceded the Brexit vote. Fed Chair Janet Yellen and her colleagues have sounded cautious about the US economy, and the financial instability caused by Brexit could delay any rate hikes until 2017. The US economy is in good shape, but the Fed hasn’t raised rates since last December and is unlikely to seriously consider any rate hikes unless employment and inflation numbers point upwards.

The Brexit vote to leave the European Union continues to cause deep instability in Europe and the UK and wiped out a staggering $3 trillion from global stock markets. Although the financial markets have stabilized, the British pound has shed about 11 percent since the vote, and is trading at 30-year lows. British politicians have sought to calm the public and the markets, but the pound’s free-fall underscores that the situation is anything but normal. The country’s political picture is in flux, as the Conservatives are choosing a new leader to replace Prime Minister Cameron and elections may follow later in the year. On the financial front, the pound has taken a beating and London’s position as a world financial center could be in jeopardy. Last week, the normally even-keel BoE Governor Mark Carney was surprisingly blunt, stating that the BoE planned to lower interest rates during the summer, and this will only add pressure on the battered UK financial sector.

Britain may have voted “Out”, but there is no timetable as to when the exit will take place or what type of trade agreement will define the new economic relationship between the EU and Britain. British leaders are in no rush to leave, but European leaders have called on Britain to exit as soon as possible in order to minimize the uncertainty and instability caused by the Brexit vote. When it comes to the EU, Britain finds itself in limbo (“neither in nor out”), and such uncertainty could continue to weigh on risk currencies like the Australian dollar until some decisions are reached regarding Britain’s exit from the EU.

Monday (July 4)

• 19:30 Australian AIG Services Index. Actual 51.3
• 21:30 Australian Retail Sales. Estimate 0.3%. Actual 0.2%
• 21:30 Australian Trade Balance. Estimate -1.72B. Acutal -2.22B

Tuesday (July 5)

• 00:30 Australian Cash Rate. Estimate 1.75%. Actual 1.75%
• 00:30 RBA Rate Statement
• 10:00 US Factory Orders. Estimate -0.8%
• 10:00 US IBD/TIPP Economic Optimism. Estimate 49.3
• 14:30 US FOMC Member William Dudley Speaks

Upcoming Key Events

Wednesday (July 6)

• 10:00 US ISM Non-Manufacturing PMI. Estimate 53.3
• 14:00 US FOMC Meeting Minutes

*Key releases are highlighted in bold

*All release times are EDT

AUD/USD for Tuesday, July 5, 2016

AUD/USD July 5 at 6:25 EDT

Open: 0.7525 Low: 0.7484 High: 0.7544 Close: 0.7498

AUD/USD Technical

• AUD/USD is showing limited movement in the Asian and European sessions
• 0.7472 is providing support
• 0.7612 is a strong resistance line
• Current range: 0.7472 to 0.7612

Further levels in both directions:

• Below: 0.7472, 0.7339, 0.7251 and 0.7160
• Above: 0.7612, 0.7739 and 0.7835

OANDA’s Open Positions Ratio

AUD/USD ratio is showing gains in short positions on Tuesday. This is consistent with strong gains by AUD/USD which resulted in the covering of long positions. Long positions have a small majority (52%), indicative of slight trader bias towards AUD/USD continuing to climb 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.