Konstantin Boykachev

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Konstantin Boykachev

CEO Proforexea LLC

Honest Coder

Professional Trader

Blog Post

AUD / USD. Preparing for the RBA meeting

August 6, 2018 Analytics

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The Australian dollar is preparing for two events that will determine the vector of its further movement. Tomorrow, the Reserve Bank of Australia will have a meeting, and on Friday, the quarterly report of the Central Bank will be published. And although traders do not expect any decisive action from the regulator in the near future, the general tone of rhetoric will allow the “Aussie” to choose a vector of a further movement against the background of a contradictory fundamental picture.

In general, the weekly chart of the pair AUD / USD says that the pair was stuck in the flat since mid-June. Trading in a relatively wide price range, AUD / USD actually stays in the same place, trading at the border of 73rd and 74th figures. The contradictory nature of the fundamental factors does not allow the bulls or bears of the pair to claim their rights to the fullest, even on the monthly chart, the downtrend has come to naught. All in anticipation of a strong and unequivocal news pulse, which will point the way of the AUD / USD, at least in the medium term.

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The previous news background was of a heterogeneous nature. For example, the labor market, on the one hand, showed the maximum increase in the level of employment this year, but, on the other hand, it showed an increase in the supply of labor. The vacancy rate jumped by almost 25% to 240 thousand. This state of affairs suggests that salaries will grow at a slower pace, slowing the dynamics of inflation.

By the way, the latest data on inflation also disappointed the market. In the second quarter, the consumer price index remained at the level of the first quarter (0.4%), and in annual terms increased to 2.1%. And although the dynamics, in general, are positive, experts expected more pronounced growth. Core inflation (the main indicator of inflation that is being monitored by the RBA) remained at the level of the first quarter (1.9% y / y and 0.5% q / q). This result turned out to be lower than the forecast values, supplementing the so-so “unhappy” picture.

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Thus, the macroeconomic statistics are not on the side of the Australian dollar. Core inflation is still far from the RBA’s target range, while weak growth in wages is hindered by inflationary growth in the country. The next week (August 15) will publish the labor cost index (WPI), which is likely to confirm this trend but the RBA meeting will take place before this release, so regulators will have to deal with previously published figures.

Now, a few words about positive trends. Strange as it may seem, the Australian recently “keeps afloat” thanks to the commodity market, which is gradually resuming its growth, despite the US-China trade conflict. Several factors contribute to this state of affairs. In particular, the demand for iron ore warms up the construction market in China, which demonstrates an unprecedented activity. After a recession almost to the 60th mark, now a ton of iron ore is traded in the area of 68 dollars. And although experts warn that the construction market is “overheated” and will soon be followed by its “cooling”, at the moment the demand remains at a high level.

And steel also becomes more expensive. But in this case, because of the possible tightening of environmental legislation in China. In the market, there were rumors that the authorities of the People’s Republic of China could significantly limit the permissions for steel smelting in the near winter to reduce air pollution. According to the Chinese press, Beijing intends to reduce steel production in the country’s six largest metropolitan areas by half, and in two dozen industrial centers by 30%. For comparison, last year China cut production only in four cities of the country. Against this background, the demand for steel has increased, and the cost per ton has risen to a five-year high.

As you can see, the fundamental background for AUD / USD is not unambiguous. Also, we must not forget that the trade war between the US and China is still gaining momentum. The White House plans to impose higher duties (25% instead of the previously planned 10%) on Chinese goods, with a total value of $ 200 billion. In turn, the Ministry of Finance of China said that in that case, it would impose duties with differentiated rates on American goods worth 60 billion a year. On Friday it also became known that China can introduce 25 percent duties on the import of liquefied natural gas from the United States. All this testifies to the further escalation of the trade conflict between the countries.

Against the background of such an ambiguous fundamental picture, the meeting of the RBA and the quarterly report of the regulator are of great importance for traders. Most likely, the regulator will again take an extremely cautious position, noting certain positive moments. The phrase that “the next step of the Central Bank will be the rate increase rather than its reduction” is unlikely to cause emotion among market participants. The market does not expect the RBA to raise rates before the second half of 2019, so this rhetoric, in fact, does not say anything. But if the regulator focuses attention on the weak growth of inflation, the level of wages and the risks of the US-China trade war, the Australian dollar will be under considerable pressure. In this case, the pair AUD / USD can descend to the bottom of the 73rd figure, and even test the area of the 72nd figure, if the RBA rhetoric turns out to be softer than expected.

The material has been provided by InstaForex Company – www.instaforex.com

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