RBA Preview: Not enough to kick-start anything in AUD/USD at make-or-break levels

• RBA meets this Tuesday, markets expecting no change and minimal AUD influence.
• Technically, AUD is at make-or-break resistance.
• Geopolitical risks weigh on the bullish prospects of AUD. 

The Reserve Bank of Australia will announce monetary policy on Tuesday at 14.30 pm local time (GMT+10, 04.30).  

The central bank's governor, Phillip Lowe, has already been very clear that rates will remain low for many years to come and that there is no preference for negative rates. The feeling is that the central bank is in the right place with its monetary settings, so no changes are expected this time around.

Considering the various less negative economic inputs and the end of the lockdowns, the RBA is likely to remain cautiously optimistic, striking an upbeat tone with regards to COVID-19 which has not been as bad as initially feared. There could also be positive prospects for Australia's labour market, although noting the wider implications to a global economic slowdown as well as geopolitical turmoil and the risks of Chinese retaliatory measures.

The current environment surrounding a very resilient AUD makes for compelling technical analysis at this juncture, although the RBA may not be the catalyst that a trader might hope for this week. 

AUD/USD has reversed 100% of the COVID-19 downtrend

Should the Bank only reinforce its commitment to employment and inflation objectives, for instance, then this would be implying, therefore, that rates are held for the next few years. Such an outcome would be making for a balanced impact on AUD at a time where, from a technical analysis standpoint, it is make-or-break time for the market. More on this here and below.

Also, traders may wish to lean on the side of caution to any hawkish bias perceived in the RBA's upbeat tone. Positive outlooks from the RBA could easily be negated in the same breath by the sheer uncertainties pertaining to COVID-19 as well as by the tensions with China that have just added some extra uncertainty. Overall, the main message will be clear – the RBA will remain committed to providing stimulus if needed.

China, the yuan an equities

Rather than the outcome of this event, Sino diplomatic/trade developments will be the major driver of AUD and its correlation to global equities, (more so than commodity markets at this point) as well as the yuan will be a key focus. 

As mentioned, the AUD has recovered fully from the COVID-19 sell-off. However, while Australia has come out relatively unscarred by the pandemic, with one of the lowest infection rates of the developed world, with only 7,193 confirmed cases of which 6,614 have already recovered and just 103 deaths, the nation is now fighting a different kind of battle - trade wars. 

Surprisingly, AUD has been extremely resilient to the geopolitical turmoil, so far. However, so too have global equities, especially on Wall Street. The resilience in US stocks, mind you, is more likely a function of investors expecting there to be plenty of pent up demand and fear of missing out. More bad news from geopolitics, which after all can go either way without there being anything particularly tangible at this juncture, doesn't necessarily equate to immediate sell-offs in US stocks. The momentum is still with the bulls.

However, you can only stretch a rubber band so far. It is also worth noting that, the S&P 500, for instance, has seen a recovery which doesn't reflect the health of the economy. When the hard data arrives, with prolonged high levels of corporate bankruptcies seeping though and unemployment, if the correlation between AUD and equities continues, there can only be one outcome. Moreover, when you couple the recent escalation of trade wars with a bearish outlook for global equities in a post-COVID-19 global economy, again, there can only be one outcome for AUD.

The Chinese yuan has already raised the concerns that China is weaponising its currency in response to a war of words that started by the US administration calling out China for its relaxed COVID-19 pandemic preventative measures. In anticipation of trade wars, the regime could well be purposely manipulating its currency for which is bad news for Australian exporters. Broadly speaking, AUD typically follows in-suit of a lower yuan. Also, there is now the speculation that China is planning to impose an import ban on Australian coal and this week could reveal some kind of confirmation.

Trade wars between China and Australia may well be a function of how US-China tensions evolve. Following US President Donald Trump's speech on Friday, a response is expected from China. Again, there can only be one outcome for AUD as a result. The long-term conditions, in such a geopolitical environment, are heavily bearish for AUD. 

How might AUD respond to the RBA

Given this fundamentally bearish backdrop for AUD, it is hard to see through the negatives and predict a bullish outcome from this week's RBA. Keeping in mind also, that we will have Aussie growth data for QoQ in Q1. However, that data will hardly tell of the true impact of the lockdown given the data was collated prior to the implementation of the restrictive measures of late March. 

Nevertheless, there is an old market adage  – the trend is your friend until it isn't. The question here is whether there is enough bullish sentiment left in markets at this juncture and how much of the V-shaped COVID-19 is already priced into FX? 

AUD/USD, as seen on the above daily chart, has reached the 200-day moving average and the 2019 daily trendline, as well as Oct and Feb support, turned resistance. In order to take a position in this pair, we need to zoom in and gauge the current market conditions.

Beyond the fact that the bulls have fully recovered from the COVID-19 bear trend, what we can see is that they are also defending the daily 20/21st May support structure on the daily chart following a 61.8% Fibonacci retracement of the 26 May impulse. This is bullish in bullish market conditions:

However, until the market can close above the prior 26 May impulse, there is no confirmation that this clearance of the trendline and confluence of the 200-day moving average isn't just another fakeout. Resistance here is bound to be a tough nut to crack, especially when you throw in the geopolitics. 

Meanwhile, bulls can have comfort that price is above the 20 4-hour moving average and MACD is also bullish.

Overall, a push is expected to the upside. However, can a valid positive risk-reward ratio be placed with a stop below support structure once a fresh high is recorded? Perhaps there are higher conviction trades elsewhere which offer a better risk to reward ratio to look for?

On failures to the upside, 0.6500 and 0.6480 would be a compelling downside target area ahead of 0.64 the figure. However, the RBA alone is unlikely to set-off such an outcome this week although a combination of geopolitical risk could certainly get the trade going. Failures of a 200 DMA and trendline resistance are usually high conviction conditions for a positive outcome. 

For a full analysis of both the bullish and bearish outlooks, see here: 

• Chart of the Day: AUD/USD is at make-or-break resistance, 0.6400 or 0.6820