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WEEK AHEAD: APRIL 05

Short Description

The AUD/USD has dropped 500 pips from its peak this year at 0.80. I discuss whether or not a top is in place for the Aussie dollar as well the RBA meeting and the rest of this week’s economic calendar. Thanks! Rich

Video Script

AUD/USD uptrend over? | RBA Meeting | WEEK AHEAD (Apr 5-9, 2021)

 

Hi everyone, so I’m previewing the first full week ahead in forex and financial markets of the second quarter. The two events that stand out for me are the RBA rate decision and FOMC minutes- so it makes sense to have a look at the AUD/USD currency pair, which is looking a bit toppy after touching 0.80. I’ll also rundown the other highlights in this week’s economic calendar.

 

AUD/USD has pulled back from resistance caused by the late 2017 and early 2018 peaks as well as the 0.80 level. The pullback has carried the FX pair down around 500 pips to the 0.75 handle and fresh 2021 lows. 500 pips is not much given the 2500 pip rally from the March 2020 low. A trendline connecting the March 2020 low to the November 2020 low has been broken but the Aussie is still above its 200 DMA.


Service sector PMIs will be an important indication the relative strength of the economic rebound across the world. The dollar has been rising because there’s an idea the US recovery will speed past that of Europe, which has relapsed into new lockdowns. The RBA are expected to hold rates steady on Tuesday. FOMC minutes on Wednesday will give us bit of insight into the Fed’s ultra-dovish last meeting. Same goes for the ECB minutes on Thursday following the decision at the last meeting to front-load its PEPP bond buying in what many are calling quasi-yield curve control. China CPI and US PPI will be ones to watch for the whole ‘inflation trade’ on Friday.

 

If we backtrack for a moment, let’s keep in mind that this big rally in the Aussie dollar over the past year has basically been on the back of Australia benefitting from the global economic rebound after the pandemic and a possible commodity super-cycle. This outlook is basically unchanged for most investors – in fact Biden’s infrastructure plan has even bolstered it. The big question is whether markets have already priced in the boom and whether prices should now start to think what happens when the stimulus runs out. 

 

We can expect the Reserve Bank of Australia this week to speak similarly to other central banks – basically pushing back against the narrative that the economic recovery will mean they need to end the monetary stimulus. Less money printing generally means a stronger currency. One ‘technical’ thing the RBA could do is change the bonds they are buying in their QE program. If the central bank starts buying November 2024 bonds instead of May 2024 bonds like it is now to control 5-year yields near 0.01%– that would be a dovish message to fight back against the idea a rate hike is coming as soon as 2022. A dovish message would support Aussie bears.

Still, as I say – the thing that has been pulling AUD/USD lower is really US dollar strength rather than Aussie dollar weakness. The successful US covid vaccination program and big fiscal stimulus means investors are buying US dollars in a belief the Fed will need to taper its QE program before other central banks to contain inflation. I mentioned earlier that the Fed and Jerome Powell tried to push back against this message at the last meeting but markets largely ignored it and the dollar strengthened anyway. The minutes will be fresh chance this week for the Fed to push its dovish message and so its just a matter of whether the market buys it or not. If they don’t – that implies more USD strength and AUD/USD weakness.

 

Right thanks everyone, good luck trading this week and make sure to subscribe so you don’t miss the next episode of the week ahead.