Tuesday, March 31, 2020

Does the Australian dollar have more room to rise against the greenback?

  • AUD
  • US payrolls
  • RBA


Analysts’ Pick: Does the Australian dollar have more room to rise against the greenback?

  • RBA’s meeting minutes should be of no surprise, signalling to financial markets of their readiness to do more to help relieve the Australian economy
  • ADP’s employment report for the US for the month of March likely to not take the sharp rise in unemployment in the US at the end of March into account
  • ISM’s manufacturing report will probably be able to find some false strength in slower supplier deliveries
  • Our outlook for AUD/USD is skewed to the upside for tomorrow’s economic releases, possibly rising past 0.6237’s level.

The RBA's March 19th monetary policy meeting minutes are set to be released tomorrow at 8.30am (GMT +8). The Australian central bank decided to cut rates by an additional 25bps on March 19th to 0.25% for a total of 50bps since March 3rd. It also announced a government bond purchase program to achieve a yield roughly equivalent to its target cash rate of 0.25% for three-year Australian government bonds, and a term funding facility for banks with the aim of targeting small and medium companies.

We expect little surprises from the meeting minutes. The decision to slash rates and introduce new unconventional monetary policy tools should have been unanimous. With Australia's economy now heavily impacted by the virus (Australia now has more than 4,000 cases of the coronavirus), the meeting minutes has to signal that the stimulus package on March 19th was not the final one. We view that this is likely the case, especially with cases of the coronavirus almost doubling on over the week of the meeting.

Australia’s number of cases of the virus started to show signs of moving towards an exponential rate of spreading during the week of the unscheduled RBA meeting on March 19th


Then later on in the evening, the ADP's private employment report for the US for the month of March will be released, followed by ISM's manufacturing PMI report for March. Both reports should show a contraction in the US economy.

ADP's employment report will more than likely show a decline in jobs in the private sector in March, as companies likely starting laying off workers since the onset of the virus in the US, which only escalated through the second half of the month.

Approximately 98% of the US’ current total cases of the virus (82,025) was detected after March 12th


But we do expect ADP's overall measure of employment to decline roughly 100k from February, less than consensus of a 150k fall, since we believe the bulk of layoffs to only have come in during the second half of the month. This is due to both ADP and the US Bureaus of Labour Statistics (BLS) only considering employment on or before March 12th (although ADP may make use of linear interpolation to account for missing employment on the 12th depending on certain factors) for the month of March.

Initial jobless claims surged to a historical high of 3.28mn for the week ended on March 20th from only 267k from the week ended March 13th


We also will be focused on the employment data by company size, which should show smaller firms being impacted the most as compared to larger or medium sized firms as smaller firms likely have less liquidity for emergencies and lower tolerance for remote working conditions.

Also, while ADP's employment data may provide some indication of Friday's NonFarm payrolls report for March, the magnitude will probably deviate by a large margin since the difference in methodology between the two surveys (ADP measures workers that are active while BLS measures workers who were paid during the period) will likely skew ADP's employment data lower as compared to the BLS survey.

ADP’s measure of employment sank more than BLS’ employment measure in the 2008 Financial Crisis


ISM's manufacturing PMI report for March will shed some light on the supply chain impacts that was already seen in February as a result of China's lockdown. In an unscheduled survey on March 11th, ISM reported that 44% of firms had no plans in place to deal with the disruption in the global supply chain resulting from China's lockdown, while 75% saw potential disruptions from lockdowns and expected the severity of the current situation to continue into the second quarter. As a result, we should see ISM manufacturing shift back into contractionary levels. But while most of the report's sub-indices should show weakness, the slower supplier deliveries should provide the index with some false strength thanks to lockdowns across the globe. We place ISM's manufacturing PMI above economists’ estimates of 45.0 as a result, although only slightly higher at 46.0.

Based on the above, the Australian dollar should find some strength and rise against the greenback as economic data in the US starts to show some of the earlier economic impact of the coronavirus outbreak. A likely dovish signal from the RBA is also likely to help the Aussie on its road to recovery. We expect AUD/USD to rise towards 0.6237's level early into Wednesday's trading session, and break that level later in the day, while moving towards 0.6349's level.


Technical Analysis:         


Aussie bulls managed to push the Aussie back in to an uptrend after a sharp decline as a result of the coronavirus outbreak. Now, the greenback is being sold and the bulls are taking advantage, pushing the Australian dollar back towards levels earlier in the month. But MACD indicates that the bull run may be over, as the MACD line looks to be crossing below the signal line, although RSI signals that there may still be room for the Australian dollar to strengthen against the greenback before rising above overbought region. Coupled with our fundamental analysis for tomorrow, we believe that the outlook for the AUD/USD is skewed towards the upside, possibly breaking the resistance level of 0.6237 to range between the new resistance and support level of 0.6349 and 0.6237 respectively.

Support: 0.6124 / 0.6025 / 0.5896

Resistance: 0.6237 / 0.6349 / 0.6439

AUD/USD Chart (H4)