Australian Dollar Momentum has Shifted Back to the Downside, Analysts Say

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- AUD rejected by key moving-average, enters into retreat. 

- Westpac brings forward timing of forecast for third rate cut.

- AUD/USD momentum moved to the downside says MUFG.

- But adds; the downside should be relative limited from here.

- CBA also says further AUD losses to be limited as Fed cuts.

The Australian Dollar was on its back foot Wednesday after being repelled from a key technical resistance barrier and as investors bet the Reserve Bank of Australia (RBA) will cut its interest rate again sooner rather than later, but multiple analysts are saying that further losses should be limited. 

Australia's Dollar has beat a retreat from a steady U.S. Dollar since being rejected by 200-day moving-average at 0.7075 last week, although much of what happens next will be determined by price action this Wednesday, according to technical analysts studying trends and momentum on the charts. 

"AUD/USD continues to ease back from a very tough band of resistance, namely .7070/89. This is the 200 day [moving average} and the 8 month downtrend. The intraday Elliott wave counts have now turned more negative and we would allow for a dip back towards the 55 day MA at .6958," says Karen Jones at Commerzbank. "The .6911 10th July low guards underlying support at .6865 the 17th May low and the mid June low at .6832."

Jones has been betting against the Aussie since last week and is targeting a move down to 0.6960 for the AUD/USD rate, where she says she'll close her trade. Her outlook for the exchange rate over the next three months is neutral. Analysts at MUFG, the world's fifth largest bank and a significant currency dealer, say Wednesday's fall  shouldn't necessarily mean an end to the six-week rally undergone by the Aussie. 

"Friday’s failure of AUD/USD to break above resistance from highs recorded in April 2019 and December 2018 has shifted the momentum back to the downside," writes Lee Hardman, an analyst at MUFG, in a note to clients. "We are not convinced that this will mark a sustained turn for AUD/USD and there are reasons to expect the downside to be relatively limited as well."

Above: AUD/USD rate shown at daily intervals, alongside 200-day moving-average (yellow line).

Australia's Dollar was driven lower Wednesday not only by technical factors but also the latest by interest rate forecasts from Westpac. The influential lender now says the RBA is likely to cut its cash rate a third time in October rather than waiting for November, and that interest rates could reach a new low of 0.5% in 2020, down from 0.75%.

Westpac says the Australian unemployment rate is likely to rise over the remaining summer months, which will force the RBA to cut the cash rate again. The RBA has explicitly tied future monetary policy decisions to developments in the labour market. Some say the forecast has forced a scramble by investors to price-in the earlier move. 

"AUD underperformed across the board overnight after Westpac revised down their terminal RBA cash rate forecast to 0.50% in February 2020 from 0.75% previously. Australian 2‑year swap rates fell by roughly 6bps and Australia‑US 2‑year swap spread turned more negative. Also weighing on AUD was another fall in iron ore futures in response to Vale's announcement that it will restart some curtailed production," says Kim Mundy, a strategist at Commonwealth Bank of Australia (CBA). 

Australia's economy created only a paltry 500 new jobs overall in June and the unemployment rate remained at 5.2%, up from 4.9% back in May. The RBA forecast in May that the jobless rate would sit around 5% in 2019 and 2020 but Westpac says it'll probably end the year up at 5.4%. 

The RBA has said it needs unemployment down at 4.5% if it is to see the kind of wage growth that policymakers say is necessary for inflation to rise sustainable into the 2%-to-3% target band. But the economy is slowing and the jobless rate rising further from the desired level.

Arguing for further downside during the London session was CBA survey data that suggested the economy may have slowed again in the third-quarter which, if anything, will merely encourage the RBA to do as Westpac suggests it will and cut the cash rate for a third time sooner rather than later. 

Above: AUD/USD alongside Pound-to-Australian-Dollar rate (orange line, left axis) at hourly intervals.

"More worryingly, there was also a sharp fall in employment intentions at the start of Q3, led by the services sector.  This PMI component is at the lowest level since the series began in May 2016," says Belinda Allen, an economist at CBA. "The direction of the labour market is also the key for the timing of the next RBA move in the cash rate."

The CBA composite PMI, which measures activity as well as changes in the outlook for the services and manufacturing sectors, fell in July after subindices of the two constituent sectors also declined. The services index saw the largest fall, from 52.6 to 51.9, although the manufacturing index fell from 52 to 51.4. 

CBA's survey was taken during a month when the RBA had just announced two back-to-back interest rate cuts in an effort to lift inflation pressures by stimulating the slowing Australian economy. Central banks adjust interest rates in order to manipulate inflation, which is sensitive to economic growth. 

"We anticipate the RBA to cut the cash rate again by 25bps in November to 0.75%. However, we see limited downside to AUD/USD over the remainder of 2019 because we expect the FOMC to cut the Fed funds rate by 75bps by December 2019. Importantly, Australia’s high terms of trade will continue to support AUD," CBA's Mundy writes.

Changes in interest rates are normally only made in response to movements in inflation but impact currencies because of the push and pull influence they have over capital flows, and their allure for short-term speculators. Capital flows tend to move in the direction of the most advantageous or improving returns, with a threat of lower rates normally seeing investors driven out of and deterred away from a currency. Rising rates have the opposite effect.

The AUD/USD rate was 0.14% lower at 0.6983 Wednesday and has fallen 0.96% this year. Meanwhile, the Pound-to-Australian-Dollar rate was 0.69% higher at 1.7902 Wednesday but is down 1.07% for 2019.  CBA forecasts the AUD/USD rate will rise to 0.72 by year-end and that it will finish the 2020 year up at 0.74. The Pound-to-Australian-Dollar rate is expected to fall to 1.7777 by year-end before declining to 1.7568 by time the curtain closes on 2020.  

Above: Pound-to-Australian-Dollar rate shown at daily intervals.

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