Reserve Bank of Australia Preview: How long could policymakers remain confident?

The Reserve Bank of Australia is having a monetary policy meeting this Tuesday and is likely to remain on hold, after cutting rates to a record low of 0.1%. Policymakers could provide some fresh clues on their economic outlooks, although the country will release its Q3 Gross Domestic Product early Wednesday, foreseen at -4.5% from -6.3% in Q2. Market players will likely wait for this latter release and compared it with the RBA’s forecast before taking directional decisions on the Australian dollar.

As it happened in the last months, Lowe & Co. are likely going to reiterate that the economy has been doing better than anticipated throughout the pandemic. Last Friday, Victoria reported three weeks in-a.row without new cases or deaths. Once again, authorities have controlled the coronavirus outbreak, although at the cost of locking down the epicenter of economic activity. Australia is slowly easing measures, but restrictions remain.

China’s decision to impact the Australian economy

Meanwhile, the market seems to be ignoring increasing tensions between the country and China. Ever since Australia launched an inquire over the origins of COVID-19, Beijing has been putting caps on Australian imports, banning a long list of commodities, including coal, copper, beef and barley. China is the Australian top export market, worth $104 billion in 2019, according to the IMF. And while the country may have dealt well with the latest crisis, it may suffer big with this newly born one that can have a much larger effect on the local economy.

Anyway, it seems unlikely that the RBA will refer to the issue in the upcoming meeting. If it does, it could be quite explosive, and result in a plummeting AUD.

AUD/USD possible scenarios

The AUD/USD pair is retreating from a November high of 0.7406, down for the day but holding on to most of its monthly gains.  The daily chart shows that the bullish case has been losing momentum, yet at the same time, the pair is far from bearish. In the mentioned time-frame, the 20 DMA continues advancing and providing dynamic support at around 0.7290. The larger moving averages remain below it without directional strength. In the meantime, technical indicators retreat within positive levels, with the Momentum nearing its 100 level and the RSI holding near overbought levels.

In the nearest term, the latest slide has put the pair at risk of falling. Still, as long as it holds above the mentioned 0.7290 support, dips will likely be seen as buying opportunities. Below such level, 0.7250 and 0.7200 are the next supports. From the current level, resistances come at 0.7370 and 0.7413, this last the year’s high. Further gains beyond it could see AUD/USD approaching 0.7460.