Monday, June 1, 2020

Can optimism from the RBA help push AUD/USD back to December’s levels?

Tags
  • Dollar
  • AUD
  • ISM PMI
  • RBA

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Analysts’ Pick: Can optimism from the RBA help push AUD/USD back to December’s levels?

  • ISM’s manufacturing PMI report for May should show some improvements in employment and new orders as demand has likely bottomed out in April
  • Protests in the US is likely to continue to put more pressure on the dollar as a result of greater economic strain in the US
  • The RBA has little reason to make any changes to its monetary policy tomorrow as the Australian economy continues to reopen
  • The outlook for AUD/USD looks titled to the upside as a result

AUD/USD may continue to rise at today and tomorrow's trading session as the greenback looks set to continue to fall on weak economic data and reduced geopolitical risk while the Australian dollar may find strength from a potential hold on monetary policy by the Reserve Bank of Australia (RBA) at its monetary policy meeting tomorrow.

ISM is set to release the manufacturing PMI report for May later today at 10pm (GMT +8), but the headline reading is likely to be inflated by the global supply chain disruption again. While delays in supplier deliveries helped support the headline figure in both March and April, May's supply chain disruption should have eased slightly as lockdowns across the world start to be lifted.

The focus should then be on the new orders and employment sub-indices, which would then give financial markets a better sense of an expected recovery. There should be some improvement in the employment sub-index for manufacturing industries as lockdowns started to be eased for multiple states since the start of May. Both initial and continuing jobless claims support this as overall employment started to ease through May, while continuing claims had its first decline since the onset of the Covid-19 pandemic at the end of the month.

Jobless claims data signal that unemployment likely peaked in April

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New orders are likely to show some improvement as well since April is likely to have been the bottom of global demand. But transportation equipment is likely to continue to weigh on the index however, along with petroleum thanks to the pressure on the US shale oil industry from low oil prices. Hence, while an improvement in new orders is likely, only a slight one should be expected.

Distortion from a global supply chain disruption should start to ease from Aprl as lockdowns across the world starts to get lifted

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The dollar however, should be little changed on the release of the ISM's manufacturing PMI data unless sub-indices excluding supplier deliveries largely surprise the market, which would imply that the sector is recovering at a faster-than-expected rate. Instead, the greenback is likely to be more influenced by geopolitical issues as well as non-economic data. With protests in the US escalating, the strain on the US economy is likely to be stretched even greater. This is already apparent from multiple retailers extending closures despite easing of lockdown restrictions in the US, in order to keep their employees safe. It also increases the risk of a new wave of Covid-19 infections in the US as crowds gather for demonstrations. In addition, risk aversion in regards to US-China relations have mostly eased after US President Donald Trump's press conference last Friday, where Trump mostly only focused on coming down hard on Chinese companies listed in the US to comply with US accounting and disclosure requirements instead of the phase one agreement with China. Investors mostly took that as a sign that a reinforcement of tariffs on Chinese goods are unlikely in the short-term. Our outlook for the dollar is hence tilted to the downside for the week, especially as the yen and gold is more likely to be more in demand as safe haven assets as opposed to the greenback in the current situation.

Demand the dollar as a safe haven seems to be fading as a result of reduced risk of a renewed US-China trade war as well as the ongoing protests in the US

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As the Australian economy begins to recover from economic pressure from the Covid-10 pandemic RBA officials are likely to focus on reviewing the current state of the economy and keep its monetary policy tools instead. Economists mostly expect this, with all 34 of Bloomberg's surveyed economists expecting the RBA's cash rate target to remain at 0.25%. In addition, with the RBA already tapering off its asset purchases since the start of May, it seems unlikely that RBA officials have any incentive to increase its asset purchases at this point of time. The key drivers for AUD are likely to instead be the outlook from the RBA. We expect the central bank to remain cautious on risks stemming from the escalation in tension between the US and China, as well as continued pressure from the Covid-19 pandemic but be more positive on the outlook for the domestic economy. This is due to the improvement in the Chinese economy after lifting its lockdown restrictions much earlier than other developed economies, as well as New Zealand easing its lockdown restrictions. While global demand is still under pressure, it has likely bottomed out, which will also likely help commodity prices gradually recover as well.

Tapering of RBA bond purchases suggests that the RBA is now more optimistic of the domestic economy

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Our outlook for the Australian dollar is hence positively skewed, which would imply that there may be some upside potential for AUD/USD on the release of today's ISM manufacturing PMI report as well as the RBA's monetary policy meeting tomorrow. In addition, the Australian dollar is likely to hold onto some of its momentum in the short-term which could result in the Australian dollar breaking 0.6773's level and rise towards 0.6934.

Technical Analysis:

AUD/USD

The Australian dollar has broken past the 100% Fibonacci retracement level and looks likely to continue on an uptrend cycle in the short-term. While RSI indicates that the Australian dollar is trading at overbought levels, there may still be room for the Aussie to continue to climb before regressing thanks to fundamentals. Both ISM’s PMI report for the US and the RBA’s decision looks to be favouring bulls, which could potentially push the currency pair back higher to levels last seen in January. The current momentum should also be able to help bulls charge forward in the short-term. As a result, the bulls will probably be able to retest the 0.6773 resistance level and is likely break it to rise closer towards 0.6934 before normalising back downwards as traders take profits.

Support: 0.6651 / 0.6604 / 0.6560

Resistance: 0.6773 / 0.6934 / 0.7029

AUD/USD Chart (H4)

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