Wednesday, September 23, 2020

Does AUD/USD have room to fall further after reaching a one-month low?

  • Dollar
  • AUD
  • US Durable Goods Orders
  • RBA


Analysts’ Pick: Does AUD/USD have room to fall further after reaching a one-month low?

  • RBA’s Debelle remarks suggests higher likelihood of the RBA easing in October or November
  • Risk aversion and liquidation likely to be main driver behind the dollar’s upward momentum
  • Continuing claims likely to fall further as more Americans reach their 26th week of claims, but the dataset is unlikely to have lasting impact on the dollar
  • Durable goods may come in lower than economists’ estimates and result in possible increased risk aversion
  • AUD/USD may have room to drop before we start to see dip buying providing some support in the short-term

The Aussie dropped to a one-month low yesterday following a speech from Reserve Bank of Australia's (RBA) Deputy Governor Guy Debelle. In his speech, Debelle remarked that the RBA continues to take other policy options into consideration "given the outlook for inflation and employment is not consistent with the Bank's objectives over the period ahead". His comments were in line with RBA Governor Adrian Orr's speech earlier in July and consistent with the RBA's general easing bias even after expanding its Term Funding Facility (TFF) at September's meeting. The options mentioned during his speech were:

  1. Buying bonds further out along the curve, supplementing the three-year yield target
  2. Foreign exchange intervention
  3. Reduction of rates further without moving into negative territory
  4. Negative rates

From the deputy governor's speech, it appears that there may be a preference towards buying bonds further out along the curve and reducing rates without moving into negative territory. While Debelle noted that "developments in the foreign exchange market" will be closely watched, he also pegged the outperformance of the Australian dollar to the relative outperformance of the Australian economy's in Q1, Q2 and Q3 in comparison to other developed economies as well as the high prices of iron ores. For negative interest rates, he noted that empirical evidence remains mixed on the effectiveness of this strategy, signalling that below-zero rates is likely the lowest priority on the list. Debelle's comments sets up an even higher likelihood for additional easing later this year, possibly during October's or November's meeting. Traders has also already started to price in the higher likelihood, with Futures tracking the RBA's decision signalling that implied probabilities for a rate cut increased to as high as 89.3% on Wednesday morning in Asia, before easing to about 75%.

Australia’s economy remains one of the top performers in terms of GDP growth in 2020



Implied probabilities for a RBA rate cut in October spiked following the Debelle’s speech


In addition to what appears to be dovishness from Debelle's speech, a general risk off trend is likely to also be putting downward pressure on the Australian dollar due to its link to commodity prices. The stronger degree of risk aversion in equity markets likely impacted the currency markets as well, causing a decline in demand for the Australian dollar while at the same time boosting the greenback.

AUD/USD has a generally strong negative correlation to the VIX Index


In addition, we may continue to see the greenback strengthen as we move into second half of the week as initial jobless claims and durable goods orders for the US gets released. Jobless claims look set to continue to decline at a more gradual pace as it flattens out at high levels with the absence of more fiscal stimulus measures and seasonal adjustments putting pressure on the dataset. Continuing claims will probably decline at a quicker pace, as more and more claimants reach their 26th week of claimed benefits. This may cause a limited downside reaction on the dollar, but we do not expect it to be long lasting due to the reduced effectiveness of the dataset.

The first round of claimants since the first spike in claimants has reached their 26th weeks of claims last week


Durable goods orders for August will be released on Friday at 8.30pm (GMT +8), and is likely to follow the theme of normalisation. Economists expect a 1.0% increase in headline figures from July, but our estimates are slightly more conservative at 0.5%. This is due to the high levels of uncertainty, slowing recovery and delayed fiscal stimulus, each of which should result in a reduced propensity for capital spending. Furthermore, net durable goods orders have reached close to pre-pandemic levels and should start to slow in growth in line with economic activity in the US. While Boeing continues to suffer net cancellations for aircrafts, seasonal factors will likely help to dampen these effects. A lower than expected reading may then result in additional upward pressure on the dollar due to possible selloffs in the overall equity market.

Total durable goods orders (SA) has reached back to pre-Covid-19 levels, signalling that growth is likely to slow as uncertainty and lower aggregate demand weighs on business sentiment


Finally, Fed Chair Jerome Powell's speech later today and tomorrow will likely add to risk aversion in financial markets as he continues to warn Congress of the economic outlook in the absence of fiscal stimulus. This may also have a slight upside effect on the greenback as well, as the global outlook looks increasingly dampened. Therefore, we view AUD/USD to have additional downside as we head into the second half of the week, due to increasing risk aversion in financial markets and RBA's increased likelihood of easing monetary policy during the next two meetings in October and November. We may see the Aussie retest the 0.7080 support level during this week as a result.

Technical Analysis:


The downward pressure on the Aussie has been persistent, pushing it below the 50-day moving into what appears to be a new downtrend for the currency pair. It appears there may be more downside for AUD as investors become more bearish on the currency after dovish comments from Debelle. On the dollar side, it appears that risk aversion and liquidation of financial assets may be a driver that could potentially result in temporary upward momentum for the currency. As a result, the Aussie still looks to have additional room to fall, possibly towards the support level at 0.7080 before an expected rebound as new traders enter bullish positions in the currency pair due to overselling (RSI still has room to fall before retesting a technical support of 24.07).

Support: 0.7080 / 0.7025 / 0.6989

Resistance: 0.7147 / 0.7200 / 0.7278

AUD/USD Chart (H4)