AUDUSD: Technicals And Fundamental Picture

Summary

• I assess the AUDUSD based on its technical picture, and fundamental factors. I also take a look at iron ore prices, which have a positive correlation with the AUD.
• In all, I believe we could see much higher prices in the AUD in the weeks to come despite the neutral stance the RBA took up during its recent meeting.
• Go long AUDUSD at market (0.76), with take profit at 0.80 and stop loss at 0.73.

The Reserve Bank of Australia kept interest rates unchanged at 1.50% last week during its meeting on 4 July. That was largely expected by the market, but the AUD traded lower following the central bank's statement, where the RBA opined that the Australian economy was expected to recover gradually, though consumption growth continues to remain subdued, in part due to slow wage growth and high household debt. In all, the statement was largely neutral, but the markets had perhaps expected a more hawkish slant, given that the Bank of Canada, Bank of England, and European Central Bank had released hawkish statements the week before.

Technicals

On the weekly chart, the AUDUSD continues to make repeated higher lows, and the currency pair has gone from strength to strength since late 2016, where the pair has gone on to post a double bottom first around 0.68 levels, followed by another double bottom around 0.7150 levels.

Those two anchors have served the currency pair well and have propelled the AUDUSD to test the 0.77 repeatedly, though those levels have proven to be strong resistance. Looking at the technicals, I do believe AUDUSD has the makings to re-test and break the 0.77 resistance levels, and I would not be surprised to see 0.80 again in the pair.

Fundamentals

A) GDP

The Australian economy has been recovering well. GDP growth rate has surprised to the upside in the past two quarters, with 1Q'17 growth rate coming in at 0.3% versus 0.2% consensus, and 4Q'16 growth rate coming in at 1.1% versus 0.7% consensus.

Exhibit A: Australia GDP Growth Rate

B) Unemployment Rate

Unemployment rate in Australia has also been improving, with the past three data points in March, April and May either in line or coming in better than expectations.

Exhibit B: Australia Unemployment Rate

C) Wage Growth

One bleak spot in the Australian labour market is perhaps wage growth, which the RBA had expressed concern about. Wage growth has been tepid compared to 2014 and 2015. Wage growth has not been able to keep up with rising house prices and inflation (which we will see later), but if we do see a pickup in wage growth, perhaps fuelled by improving employment conditions, it would check off one of the boxes in RBA's wish-list.

Exhibit C: Australia Annual Change in Hourly Rates of Pay

D) Inflation and Housing Prices

The RBA has previously expressed concern with regards to higher housing prices, and a low interest rate environment will not help to curb this problem. In addition, inflation levels in Australia have been steadily increasing as well, which the RBA will surely keep a watchful eye over. Sooner rather than later, I expect the RBA to have to raise interest rates to manage rising inflationary pressures, in part due to higher house prices.

Exhibit D: Australia Consumer Price Index (CPI)

Exhibit E: Australia House Price Index

Commodity Prices

Lastly, the AUD is also impacted by iron ore prices, which account for close to 25% of the country's total exports. As such, iron ore prices tend to have a positive correlation with the AUD.

Looking at the chart for iron ore prices, price action looks bullish, and for all the negative news articles in the media portraying iron ore's bleak future as well as tumbling prices, I note that the price action has posted repeated higher highs and higher lows, which is bullish in nature. Going forward, in the weeks ahead, this could give the AUD a boost.

To sum up, looking at the technical and fundamental picture of the AUD as well as iron ore prices, I am confident the AUDUSD will re-test and breach stiff resistance levels 0.77 in the weeks to come, and I would not be surprised to see 0.80 trade in the near future.

With AUDUSD currently trading around 0.76, I think the risk-reward is attractive to go long the currency pair at market, with a take profit level at 0.80 and a stop loss level at 0.73. The rationale for the stop loss level is that should 0.73 trade, that would cause the technical picture to sour, as the chart would post a lower low. Should 0.77 resistance be breached, the stop loss at 0.73 can be raised higher to 0.75, and one can consider adding more to his/her position.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.