Australian Dollar: USD/AUD (AUD=X) Westpac: “Risk off” to drop Australian dollar to 66 cents in 2020

Australian Dollar: USD/AUD (AUD=X) Westpac: “Risk off” to drop Australian dollar to 66 cents in 2020

Australian Dollar: USD/AUD (AUD=X) Westpac: “Risk off” to drop Australian dollar to 66 cents in 2020

Over the last month it has traded down to as low as USD0.676 and back to USD0.683. Eff ectively the AUD has traded in the USD0.67 to USD0.70 range since late July.

Westpac last changed its AUD call on July 24 when we forecast the AUD would drift down from USD0.695 at the time to USD0.66 by the fi rst half of 2020. That was predicated on a further RBA rate cut in February 2020; ongoing diffi cult global environment which would favour ‘risk–off ’ currencies; and the possible use of unconventional monetary policies by the RBA.

On November 27 Westpac further revised down its forecast for the RBA cash rate with an additional cut to 0.25% by June next year. We also noted the likely adoption of Quantitative

Easing by the RBA after the last rate cut in June. That would be in the form of $2–3 billion of regular monthly purchases of Commonwealth government bonds.

With the RBA making it clear that 0.25% is the eff ective lower bound for the cash rate and given our view that the FOMC will be easing policy during 2020, the risk for the RBA is unwelcome upward pressure on the AUD once it appears that the RBA is ‘done’.

It will be at this point that it will have to adopt an open ended asset purchase policy. However the assets are likely to be limited to Commonwealth Government Securities or semi government securities denominated in AUD.

A policy of unsterilised purchases of foreign currency government bonds, which would be associated with direct sales of AUD is unlikely to be adopted by the RBA, despite it’s likely eff ective impact on AUD. The label ‘currency manipulator’ which is now being levelled at some countries by the US administration and the associated tariff response is something the RBA would avoid.

Lower interest rates and open ended QE can be expected to assert some downward pressure on AUD. But the USD0.66 target for next year is only likely to be achieved if the global environment favours ‘risk off ’ currencies, particularly the Japanese Yen; Swiss Franc; and to a lesser extent, the
USD.

The ‘big four’ issues which, we believe, will be consistent with ‘risk off ’ in 2020 are: a larger than expected slowdown in China; ongoing uncertainty around international trade; volatility in confi dence emanating from a particularly bitter US Presidential campaign; and a slowdown in the US economy.

While the US authorities are likely to respond with rate cuts from the Federal Reserve, and the Chinese authorities will embrace both fi scal and monetary policy measures, these policy responses will be applied carefully to manage the slowdown rather than provide an aggressive boost.

In this regard the approach of the Chinese will be of most signifi cance. China is a student of history. It is acutely aware of the economic disaster that befell Japan after the 1980s when ‘bullied’ by the US to accept the Plaza Accord whereby the Japanese Yen eventually appreciated (between 1985 and 1987) by around 50% relative to the US dollar.

That action constituted a major external shock to the Japanese economy. In response the Japanese authorities sharply boosted liquidity in the domestic economy which fuelled the huge asset bubbles that eventually burst and condemned Japan to ‘lost generations’. China will be mindful not to accede to US demands around its trade surplus with the US and will be careful not to overly boost domestic liquidity in response to the shock.

That means one can expect China to play ‘hardball’ with US trade demands and be careful to avoid over stimulatory liquidity policies.

Bottom line: it seems 2020 will be ‘risk off ’ with markets focussed on slow growth in both China and the US, trade tensions and political uncertainty in the US.

Technical Indicators

Overall, the bias in prices is: Upwards.

By the way, prices are vulnerable to a correction towards 0.68.

The projected upper bound is: 0.70.

The projected lower bound is: 0.68.

The projected closing price is: 0.69.

Candlesticks

A white body occurred (because prices closed higher than they opened).
During the past 10 bars, there have been 6 white candles and 4 black candles for a net of 2 white candles. During the past 50 bars, there have been 25 white candles and 25 black candles.

Momentum Indicators

Momentum is a general term used to describe the speed at which prices move over a given time period. Generally, changes in momentum tend to lead to changes in prices. This expert shows the current values of four popular momentum indicators.

Stochastic Oscillator

One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 74.9048. This is not an overbought or oversold reading. The last signal was a sell 4 period(s) ago.

Relative Strength Index (RSI)

The RSI shows overbought (above 70) and oversold (below 30) areas. The current value of the RSI is 64.30. This is not a topping or bottoming area. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a buy 90 period(s) ago.

Commodity Channel Index (CCI)

The CCI shows overbought (above 100) and oversold (below -100) areas. The current value of the CCI is 165.This is an overbought reading. However, a signal isn’t generated until the indicator crosses below 100. The last signal was a sell 3 period(s) ago.

MACD

The Moving Average Convergence/Divergence indicator (MACD) gives signals when it crosses its 9 period signal line. The last signal was a buy 7 period(s) ago.

Rex Takasugi – TD Profile

FOREX AUD= closed up 0.003 at 0.691. Volume was 16% below average (neutral) and Bollinger Bands were 24% narrower than normal.

Open     High      Low     Close     Volume___
0.687 0.691 0.686 0.691 49,307
Technical Outlook 
Short Term: Overbought
Intermediate Term: Bearish
Long Term: Bearish
Moving Averages: 10-period     50-period     200-period
Close: 0.68 0.68 0.69
Volatility: 8 7 7
Volume: 45,366 49,552 72,593

Short-term traders should pay closer attention to buy/sell arrows while intermediate/long-term traders should place greater emphasis on the Bullish or Bearish trend reflected in the lower ribbon.

Summary

FOREX AUD= is currently 0.1% below its 200-period moving average and is in an downward trend. Volatility is Our volume indicators reflect volume flowing into and out of AUD= at a relatively equal pace (neutral). Our trend forecasting oscillators are currently bearish on AUD= and have had this outlook for the last 16 periods.

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