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There is only one step from the sublime to the ridiculous. The Australian dollar, which was leading at the beginning of the year in the G10 currency race, lost ground in February, and even strong statistics on the Australian labor market did not help the AUDUSD bulls. According to the results of the last month of winter, employment rose by 64,600, surpassing the forecast of Bloomberg experts at 48,500, and unemployment fell to a half-century low of 3.5%. Such data, coupled with the continued rise in inflation, should force the Reserve Bank to continue to tighten monetary policy, but there are completely different concerns on the agenda now.
Indeed, why, against the background of statistics presenting pleasant surprises, the futures market expects the cash rate to grow to 3.67% in April, that is, only 7 bps higher than the current value of the cost of borrowing? Why did the estimated peak drop from 4.1% to 3.85% if inflation is still high, the labor market is strong, and Australians are sitting on bags of money in the form of AU$300 billion in savings accumulated during COVID-19? After all, they actively spend them, especially on services.
Dynamics of the Reserve Bank rate and its expected peak
The reason is the turbulence occurring in the financial markets and banking system of the United States. The collapse of three American credit institutions makes us involuntarily draw parallels with the events of 2008, when the collapse of Lehman Brothers became a catalyst of the global economic crisis. As a result, the Fed faced a question—is it not time to pause monetary restriction and move on to lowering the federal funds rate in the second half of 2023? The so-called "dovish" reversal undermines the bears' position on AUDUSD.
In my opinion, the Australian dollar is undervalued. Strong Australian macro data is pushing the RBA to take decisive action, and the recovery of the Chinese economy will bring many benefits to the yuan proxy currencies represented by the Aussie and its New Zealand namesake. Yes, the rise of Chinese retail sales by 3.5% in January–February and industrial production by 2.4% did not impress anyone. However, the Chinese economy traditionally stalls at the beginning of the year and then gradually spreads its wings.
In general, the situation when the West is on the road to recession and the East intends to recover rapidly is favorable for the currencies of the Pacific Ocean region. If we add to this the vulnerable positions of the U.S. dollar due to the Fed weighing the decision to end the monetary restriction cycle, the AUDUSD rally seems quite likely. Moreover, the latest statistics on American retail sales and producer prices clearly hint at a cooling of the economy.
Technically, a 1-2-3 reversal pattern may form on the daily chart of the analyzed pair. To activate it, an increase in AUDUSD quotes above the fair value by 0.672 is required, which can be used as an entry point for long position. Riskier purchases will go in case of a breakout of the 0.6665 pivot level.
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