AUD / USD: Aussie beat himself

Exactly in a week, the next meeting of the Reserve Bank of Australia will take place on June 4. This meeting will not be "passing". According to its results, members of the regulator can reduce the interest rate or announce such a step. The Australian dollar is under pressure from this factor is not the first day. Last week, the head of the RBA, Philip Low, stated that the issue of monetary policy easing will be considered at the June meeting. According to him, low rates "will support the labor market and contribute to the growth of inflation to the target level." Such dovish rhetoric low surprised the market, after which, the Australian updated the annual minimum and reached 0.6860. Moreover, rumors appeared on the market that the RBA will not stop there and this issue will return for several more times until the end of the year.


Thus, according to a published forecast from one of the four largest banks in Australia, Westpac, the Australian regulator will reduce the interest rate three times this year and in the fall it will be at around 0.75%. Currency strategists of the bank expect rate cuts in June, August, and November. After that, the rates will remain unchanged until the end of next year. It is worth noting that analysts of this bank predicted a rate cut back in February when the Reserve Bank of Australia took a rather optimistic position regarding the growth prospects of the national economy. At that time, Westpac was skeptical against the backdrop of Lo's vigorous rhetoric and the emerging progress in negotiations between Beijing and Washington.

Now, the situation has changed dramatically. First, the opinion of Westpac is shared by other large banks of the world, particularly the Commonwealth Bank of Australia and the Royal Bank of Canada. However, in their opinion, the RBA will reduce the rate twice in summer and autumn. Secondly, the head of the Australian Central Bank himself now does not deny such a scenario, at least in the context of a one-time rate cut in June.

Despite such gloomy prospects, the AUD/USD pair formed a price bottom last week and, pushing off from multi-month lows, almost came back to the key level of 0.70. What is the reason for such behavior, which seems to be illogical at first glance? In my opinion, the Australian "beat himself", yielding to panic. "Aussie" actually played a one-time reduction in the rate, which by and large, was expected a long time ago. As for the further steps of the RBA, the market still began to doubt. At least, none of the regulator's members had yet voiced such soft intentions. Therefore, the double-triple rate cut scenario still looks implausible. In other words, the market overdid it, putting aggressive rates of monetary policy easing into current price quotes.

There are other factors that keep the Aussie afloat. First, it is a commodity market. The cost of iron ore, a key raw material for the Australian economy, jumped by 2.5% exceeding $100 per ton in the second half of May for the first time in the last 5 years. Such dynamics can be continued taking into account the factors that contributed to the price strengthening.

Thus, there were interruptions in the supply of ore in Australia and Brazil at the beginning of the year. It all started with the fact that in one of the Brazilian states there was a breakthrough of the dam of the mine Corrego de Feijao, which is owned by Vale. The waste of the mining and processing complex flooded the nearby municipality, resulting in more than 200 deaths. A Brazilian court froze the company's assets to more than four billion dollars. Thereby, covering the potential costs of compensation, salaries, and other unforeseen expenses. After that, the cost of iron ore increased sharply, as one of the "three whales" of the market de facto dropped out of the game. The Brazilian authorities have already calculated that the volume of ore production may be reduced by 10% this year and the forecast for 2020 remains "so far unclear".


In addition, the price of iron ore is growing due to the introduction of American sanctions against the Iranian metallurgical sector. Iran exported about 14 million tons of iron ore last year, which is about 1% of the world's total sea shipments of this raw material. This figure should have grown to 20 million tons this year amid Vale's problems. Now, according to experts, there is a high probability that the supply of ore from Iran will be close to zero until the sanctions expire.

Thus, the growth of the commodity market, good data on the growth of consumer confidence in Australia, as well as the continued strengthening of the Australian labor market level out traders' concerns about the future steps of the RBA. Of course, problems with the growth of inflation and the country's GDP have not gone away and it is these factors that will form the basis of the June rate cut. However, the RBA may well limit itself to this step, then taking a defensive position, waiting for the outcome of the American-Chinese negotiating "thriller".

In technical terms, the support level for the AUD/USD pair is the Tenkan-sen line, which corresponds to the mark of 0.6905. Yet, the resistance level is still the price of 0.7000, which also coincides with the Kijun-Sen line on the daily chart. Taking into account the fact that the rate reduction in June has already been actually won back by the market, it will not exert strong downward pressure. Therefore, Aussie will soon follow; Firstly, the dynamics of the commodity market (iron ore) and secondly, the dynamics of the US-China trade relations.

The material has been provided by InstaForex Company -