The Australian dollar reacted weakly to the RBA's quarterly report published today, ignoring also the speech of the head of the Reserve Bank, Philip Lowe, in the country's parliament. The AUD/USD pair retreated from the upper limit of the price range (0.7410) and fluttered at the borders of the 74th figure.
This is despite the fact that the RBA has published a very encouraging forecast, and Lowe has voiced quite optimistic rhetoric in front of parliamentarians. But the Australian dollar reacted coolly to these events of a fundamental nature. And this is due to several factors. First, NonFarm Payrolls are expected today. This release is able to "redraw" the fundamental picture of the pair, strengthening or weakening the positions of the US currency. Secondly, the August meeting of the Reserve Bank of Australia was held just last Tuesday. Following the results of this meeting, the regulator determined the prospects for monetary policy in the foreseeable future, retaining the decisions that were taken in July. Thirdly, despite the optimistic remarks of the head of the RBA, there were too many "ifs" in his words. Therefore, it is impossible to talk about any hawkish intentions on the part of the Central Bank at the moment.
Moreover, Philip Lowe admitted that at the last meeting, the board members discussed the possibility of delaying the reduction of QE to $4 billion a week. But in the end, the regulator confirmed the decision taken at the July meeting to reduce the volume of purchases of government bonds from September – from the current five billion to four. Also, Lowe once again stated today that the country's economy has recovered faster than previously predicted, and especially in the labor sector, where the main indicators have returned to pre-crisis values.
At the same time, the head of the RBA also mentioned the increased risks in the context of the deterioration of the epidemiological situation in Australia. According to him, the outbreak of a more contagious delta strain of coronavirus will slow down the process of economic recovery, especially due to the current situation in the state of New South Wales. They have recently registered 200 new cases of coronavirus per day. At the end of last week, a record was recorded for new cases over the past 16 months. Reacting to the situation, the authorities of this region at the end of July tightened the lockdown conditions in the largest city in Australia – Sydney. Since July 29, the strict quarantine regime, which has been lasting for 6 weeks in a row, prescribes citizens not to leave their homes for more than 10 kilometers and go outside only if necessary. Severe quarantine restrictions have also been introduced in the states of Victoria and South Australia. Given such trends, Lowe admitted that he expects the pace of recovery of the Australian economy to slow down in the third quarter. At the same time, he added that the Central Bank expects a return to strong growth next year.
The updated forecasts of the RBA published today confirm the words of Philip Lowe. According to the quarterly report, the unemployment rate will remain at 5% by the end of this year (in June, the indicator came out at 4.9%). Next year, unemployment should fall to 4.2%, and in 2023 – to 4%. As for inflation indicators, according to the RBA, core inflation will exceed the lower limit of the target range (from 2 to 3%) in the first half of 2023. This fact will hypothetically open the way to an increase in the interest rate. Earlier, a more distant date was announced as a reference point – 2024.
Despite such optimism on the part of the RBA (very restrained, but still), the Australian dollar, paired with the US currency, retreated from yesterday's highs (0.7410) and drifted within the 73rd figure. This suggests that the Australian currency is moving exclusively in the wake of the US currency, which sets the tone for trading. The US dollar, in turn, is waiting for today's NonFarm Payrolls, which will provoke increased volatility for all dollar pairs.
Preliminary forecasts indicate that the unemployment rate in the United States will fall to 5.7% (the lowest value since March last year), and the number of people employed in the non-agricultural sector will grow by 900 thousand. According to some experts, if the number of jobs created exceeds the millionth mark, the market will resume talking about the fact that the Federal Reserve may announce the curtailment of QE already at the September meeting. In my opinion, such conversations will intensify even if the indicator comes out at the forecast level. After all, in this case, the trend is important – the key indicator has been consistently growing for the past three months: 278 thousand jobs were created in April, 580 thousand in May, and 850 thousand in June. If a positive trend is also recorded in July, the US dollar will significantly strengthen its position – including in the pair with the Australian currency.
Thus, it is advisable to make trading decisions on the pair only after the release of data on the US labor market. As we can see, even optimistic signals from the RBA "do not work" in the context of AUD/USD. Traders are fully focused on the American events, which will determine the vector of price movement. Strong NonFarm Payrolls will strengthen the uncorrelation of the positions of the Fed and the RBA, putting pressure on the pair. And vice versa – if today's figures disappoint, the pair will be able to test the 74th figure again, rising to the resistance level of 0.7450 (the Kijun-sen line on the daily chart).