The Reserve Bank of Australia has come to the aid of the Australian currency, which paired with the dollar is in the area of the psychologically important mark of 0.7000. Against the background of a general increase in anti-risk market sentiment, yesterday, AUD/USD bears were able to lower the price for a key support level, however, the regulator's rhetoric made it possible for the bulls to regain lost positions.
However, it is still too early to talk about a trend reversal. After an impulsive growth to the level of 0.7040, the pair began to gradually slide back to the "round" level. This is not surprising, given the emerging prospects for the resumption of the trade war between China and the United States. At the same time, the results of the RBA's May meeting allowed the aussie bulls to take a defensive position - at least until the issue was resolved regarding further relations between Beijing and Washington.
Let me remind you that, on the eve of today's meeting of the members of the Australian central bank, there were rumors that the RBA would lower the interest rate. On the one hand, the likelihood of such a move was indeed high: inflation in the country slowed to zero (in monthly terms), and economic growth shows a stable downward trend since the second quarter of last year. Even the commodity market, which has significantly strengthened this year (in particular, the cost of iron ore has increased), could not provide support to key macroeconomic indicators.
The RBA's reaction has been discreet for over the past half year. The head of the regulator, on the one hand, expressed concern about certain trends - but on the other hand, he was optimistic about the future prospects. This balance kept the Australian afloat, or to be more precise, above the key support level of 0.7000. This continued until the April meeting of the Reserve Bank of New Zealand, at which members of the regulator actually announced a reduction in interest rates. Many AUD/USD traders are concerned that RBA members will follow this example and will also move on to mitigate the parameters of monetary policy. Recent data on the growth of Australian inflation, which came out much worse than forecasts, only increased the excitement about this. RBA Deputy Head Guy Debelle also added fuel to the fire, not excluding the reduction of the rate "if necessary". Well, the "cherry on top" was served by the warlike tweet of Donald Trump, who, with his threats, jeopardized the negotiation process between the US and China.
In other words, the fundamental picture on the eve of the RBA's May meeting was clearly not in favor of the Australian dollar. Even the consensus forecast regarding the outcome of the meeting said that the regulator will reduce the interest rate by 25 basis points. The AUD/USD bears actively used the situation - thanks to the general nervousness, the pair plunged below the 70th figure.
However, not only did the Reserve Bank of Australia not reduce the interest rate, but it even retained "cautious optimism" regarding future prospects. In particular, Philip Lowe said that he "sees spare capacity in the economy," although quarterly inflation was below forecasts, and the uncertainty surrounding household spending remains high. In his opinion, inflation can still be brought to the target level, but this requires further strengthening in the labor market (especially in terms of wage growth).
Despite the rather "dovish" rhetoric (although not as mild as many experts had expected), the head of the RBA did not hint at a possible rate cut in the near future. This fact surprised traders, after which the aussie then jumped to the middle of the 70th figure.
This position of the RBA is explained by several factors. First, the prospects for trade negotiations between the United States and China remain unclear. According to the latest data, the vice-premier of China agreed to visit Washington, however, this visit will be short. In other words, the Chinese did not "slam the door" in response to Trump's threats, but the fate of the trade deal is still in limbo.
In addition, the wait-and-see position of the RBA may be due to the general federal elections to be held in Australia on May 18. Deputies of the Lower House of Parliament and half of the Congress will be re-elected in the country. The party that receives the majority of seats in the House of Representatives will have the right to form a government, and its leader will accordingly become the prime minister of the country. In the context of the foreign exchange market, it is worth noting that both the current government and its opposition had promised the residents of Australia that it would reduce taxes and increase investment in infrastructure. It is obvious that on the eve of "big changes" it is not advisable to change the parameters of monetary policy, especially since the country's economy does not require the use of emergency measures from the RBA: against the background of lower inflation and GDP, retail sales increased, business activity in the sectors of production, services and construction accelerated. In addition, the Australian labor market demonstrates positive dynamics, although the growth of wages leaves much to be desired.
Summarizing what has been said, we can conclude that now the Australian dollar is completely dependent on the prospects for the US-China talks. The Reserve Bank of Australia made it clear that it is not going to lower the interest rate in the near future, so in this part the AUD/USD bears lost a powerful enough trump card to put pressure on the pair. If the next round of talks between Washington and Beijing ends more or less successfully (the White House will not introduce announced duties on Friday), the aussie will have a reason to recover throughout the market - and above all against the US currency.
The material has been provided by InstaForex Company - www.instaforex.com