AUD/USD eyes the 0.70 handle ahead of RBA on Fed cut prospects

AUD/USD has been drifting higher of late following a sell-off in U.S. yields and the market's increasing sense of the Federal Reserve's (Fed's) dovishness, looking to front run the Fed on their timings of an interest rate cut. The risk-off theme in the markets had been supporting the dollar as being perceived as the cleanest shirt in the dirty laundry basket of currencies.

However, considering how a turn in heightened global growth complications would weigh on the U.S. economy, coupled with higher importation costs for businesses trading with Chinese exporters due to a prolonged tariff war, markets are expecting that the Fed will need to cut interest rates, perhaps as soon as within H2. 

Today, Fed's James Bullard has vocally adopted such a sentiment and voiced his concerns for the same. Bullard noted the yield curve inversion and said that it supports the case for lower rates. Bullard said that a rate cut may be warranted soon, citing trade and inflation risks and highlighted the chances of a recession, when saying, 'trade uncertainty means expected U.S. growth slowdown could be sharper than expected,' and that a 'trade dispute may have a larger impact on global markets.

The DXY dropped to a low of 97.20 from 97.47 on the remarks and the U.S. 10-year yield slipped in an extension of the move from 2.12% to 2.09%. Bullard has started a Q&A session so there could be some additional noise to follow which may further weigh on the dollar should he be pressed for clarity on the matter of Fed rate cuts and particular timings.

Eyes on RBA

Meanwhile, due to recent soft data and the concerns about trade wars, the RBA is expected to cut rates at its meeting tonight. A rate cut of 0.25% was already priced in which will take the rate down to 1.25%. However, the market has been short of the Aussie going into this meeting and we have seen a paring back of those shorts in recent trade, with the CFTC report showing that the Aussie bucked the trend of commodity-FX last week where both funds and asset managers were overall net sellers of commodity currencies, apart from the Aussie. They were net AUD buyers, with their net shorts falling by USD0.1bn to USD0.6bn. Asset managers increased their net AUD and NZD shorts by USD0.3bn and USD0.2bn to USD3.8bn and USD1.7bn respectively.

Considering the recent shorter positioning in the dollar where leveraged funds sold it for the third straight week, this does set the stage for an almighty sell-off in the Aussie again should the RBA be particularly dovish in the statement, (let alone a surprise 0.5% cut), citing prospects for additional cut this year. Also, factoring in a more dovish Fed, the RBA may perceive a weaker greenback and would wish to preempt a stronger AUD. However, on a surprise hold, the Aussie could well find its-self back into bullish territory towards or above 0.7080 with a confluence of the 61.8% Fibo of the mid-April swing high and recent low - This guards a run towards 0.7207, the late February high.

AUD/USD levels

Analysts at Commerzbank explained that AUD/USD has eroded its 23.6% retracement at 0.6945 and looks set for further gains to its 55-day ma at 0.7037.

"It remains upside corrective near term and continues to recover from the 78.6% Fibonacci retracement at 0.6857. Initial resistance is the March low at 0.7004 as well as the 55 day moving average at 0.7037. Further up resistance can be spotted at the 0.7207 February high. A rise above the 0.7207 late February high would target the December 2018 high at 0.7394."