The bears of the AUD/USD pair tried to push through the most important support level of 0.7000. Any victorious successes on the coronavirus front of Australia did not help the aussie, nor did positive macroeconomic reports from China. Traders virtually ignored all these factors - the pair continues to drift at the bottom of the 70th figure. Take note that the bearish sentiment is not only due to the rise in the US dollar index. Market participants are nervous ahead of the November meeting of the Reserve Bank of Australia, which will take place tomorrow. On the eve of this event, discussions among experts resumed regarding possible actions of the central bank. The baseline scenario is a 15 basis point cut in the interest rate to 0.1%. An alternative (most pessimistic) scenario is to reduce the rate to the zero level (that is, by 25 points) with a simultaneous expansion of the incentive program. Given the ongoing intrigue, the aussie is under pressure. Moreover, against the backdrop of the US dollar's rally, which is used as the main protective instrument.
The greenback continues to gradually gain momentum, amid the second wave of the coronavirus pandemic in Europe and the tightening of quarantine restrictions in key EU countries. Also, we must not forget about the US presidential elections, which will take place tomorrow, November 3. It is difficult to say which factors play a dominant role, but, by and large, this is not so important. Traders are worried that the second wave of the pandemic will hit the pace of global economic recovery. A partial lockdown was announced in France, Germany, Czech Republic, Greece and Austria and Portugal. Quarantine restrictions have also been significantly tightened in the rest of the EU (primarily in Spain, Italy, Poland), despite protests. And although the current lockdowns are not as strict as this spring, they will certainly hit the most vulnerable sectors of the economy (restaurant business, tourism, air travel, and so on). Against this background, the dollar started to be in demand as a protective asset again.
The US presidential election only adds to the nervousness. Joe Biden is ahead of President Donald Trump nationally, according to polls released yesterday. However, the Republican remains hopeful of victory thanks to the high odds in the faltering states. Trump remains close to Biden in enough states to win the 270 electoral votes needed for re-election to a second term. Reuters polls show candidates head to head in Florida, North Carolina and Arizona. Let me remind you that key states helped Trump win the Electoral College in 2016, although Hillary Clinton won the popular vote. Such is the specificity of the American electoral system.
Given the ongoing intrigue, and also against the backdrop of a possible political crisis (if Trump does not admit his loss), the US dollar is in high demand as a protective asset once again.
But the Australian dollar continues to lose its positions ahead of the November meeting of the RBA. The likelihood of monetary policy easing is 100%, but there is ongoing discussion among experts about how large-scale the central bank's steps will be. So, back in mid-October, RBA Governor Philip Lowe warned that the rate could soon be reduced to 0.1%. This is the most likely scenario. However, the minutes of the RBA October meeting, published the week before last, showed that the members of the regulator do not exclude a rate cut to zero. In addition, according to a number of analysts, the central bank will also expand QE by 100 billion Australian dollars. Take note that just last week, RBA spokesman Christopher Kent, said that "he would not be surprised by a drop in short-term rates below zero." But in my opinion, such a scenario is too unlikely to be considered among the main ones.
Nevertheless, the intrigue of the November meeting remains. If the RBA cuts the rate to 0.1%, then the aussie's reaction will depend on the subsequent rhetoric of the head of the RBA. The Australian dollar may show a correctional growth if Lowe declares that he will maintain a wait-and-see position for the foreseeable future, since the very fact of the rate cut has already been taken into account in prices. If he announces further steps to ease monetary policy, the aussie will remain under significant pressure. And even more so - if the rate is nevertheless reduced to zero. In this case, the AUD/USD bears will finally settle in the area of the 69th figure and open their way to the 0.6850 support level - this is the lower line of the Bollinger Bands indicator on the weekly chart.
Take note that the aussie has ignored the positive signals of the fundamental background. Firstly, it ignored the fact that Australia "defeated COVID-19": not a single case of coronavirus infection has been registered in the country for the second day. Curfews were lifted and quarantine restrictions were eased in Melbourne, and quarantine was almost completely canceled in all other cities and states. Secondly, the aussie ignored today's statistics from China: the PMI index for the manufacturing sector from Markit came out in the green zone (53.6 points), having updated this year's high. The market ignored all these fundamental factors.
Thus, the bears are now storming AUD/USD's key support level of 0.7000, impulsively looking into the 69th figure. You can open short positions, but only if sellers settle below 0.7000 - otherwise there is a risk of a large-scale corrective pullback. Trading decisions on the pair should be made based on the results of tomorrow's RBA meeting, which can either aggravate the situation for the aussie, or lend a helping hand to the Australian dollar, keeping it above the support level.