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AUD/USD Outlook Hinges on RBA Meeting, Australia Budget Update

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Australian Dollar Talking Points

AUD/USD extends the rebound from the September low (0.7006) ahead of the Reserve Bank of Australia (RBA) meeting on October 6, and key developments coming out of Australia may influence the exchange rate as Treasurer Josh Frydenberg is scheduled to deliver the federal budget update after the interest rate decision.

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Fundamental Forecast for Australian Dollar: Neutral

AUD/USD retraces the decline from the 2020 high (0.7414) despite speculation for a RBA rate cut, and it remains to be seen if the central bank will take additional steps to support the economy as Deputy Governor Guy Debellewarns that “under the central scenario, it would be more than three years before sufficient progress was being made towards full employment to be confident that inflation will be sustainably within the target band.”

RBA Board meeting schedule

Source: ASX

In turn, the ASX 30 Day Interbank Cash Rate Futuresreflect a greater than 60% probability for a rate cut as Governor Philip Lowe and Co. “consider how further monetary measures could support the recovery,” and the Australian Dollar may face headwinds if the RBA reduces the official cash rate (OCR) to a fresh record low.

However, the RBA may stick to the sidelines after tweaking the Term Funding Facility (TFF) in Septemberas “fiscal policy was well placed to continue to support the recovery, and Governor Lowe and Co. may rely on Australian lawmakers to further insulate the economy as the central bank rules out a negative interest rate policy (NIRP).

As a result, the pullback from the yearly high (0.7414) could end up being an exhaustion in the bullish trend rather than a change in AUD/USD behavior if the RBA retains the current path for monetary policy, and the recent shift in retail positioning may also have been a temporary event like the weakness in the exchange rate as traders turn net-short in October.

AUDUSD Sentiment

The IG Client Sentiment report shows 43.21% of traders are currently net-long AUD/USD, with the ratio of traders short to long standing at 1.25 to 1. The number of traders net-long is 9.09% lower than yesterday and 17.38% lower from last week, while the number of traders net-short is 14.25% higher than yesterday and 28.40% higher from last week.

The decline in net-long position could be a function of profit-taking behavior as AUD/USD extends the rebound from the September low (0.7006), but the jump in net-short interest suggests the tilt in retail sentiment will resurface to mimic the crowding behavior from earlier this year.

With that said, key developments coming out of Australia may drag on AUD/USD if the RBA deploys more unconventional tools to foster a stronger recovery, but more of the same from Governor Lowe & Co. may keep the exchange rate afloat as key market trends look poised to persist in October.

AUD Forecast

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong





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Forex

USD/ZAR (Rand) Price Forecast: Pre-election Stimulus Package Revisited

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USD/ZAR ANALYSIS

  • Pre-election stimulus package remains a possibility
  • USD/ZAR falling wedge formation supports further downside
  • Accommodative global risk-on outlook

President Donald Trump has put revised US stimulus hopes back on the table with comments that he may go against members of the Republican party which could cause internal difficulties. Senate Majority Leader Mitch McConnell has disclosed the fact that he has advised against concluding a deal with House Speaker Nancy Pelosi before the November 3 elections.

A pre-election relief package could support further Rand strength but a failure to do so may see short-term Rand weakness as election jitters set in. The US Dollar and other traditional safe-haven counterparts may see increased action with rising volatility expected over the next few weeks.

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USD/ZAR TECHNICAL ANALYSIS

USD/ZAR weekly chart:

USD/ZAR weekly chart

Chart prepared by Warren Venketas, IG

The weekly chart below exhibits a textbook falling wedge formation which is suggestive of a bullish (upward) continuation. Currently USD/ZAR remains within the wedge itself which could see further ZAR strength toward wedge support before price pushes higher – as the formation implies.

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USD/ZAR daily chart:

USD/ZAR daily chart

Chart prepared by Warren Venketas, IG

The daily chart highlights significant support (green) between the 16.3444 38.2% Fibonacci level and 16.5000 psychological level since early June. While price has been testing these levels over Q3 and Q4, market participants are waiting for a bigger push away from the recent sideways consolidation. A favorable stimulus decision for the Rand may see the 16.0835 being tested as initial support if the 16.3444 38.2% Fibonacci level is broken.

USD/ZAR bulls will target the 16.7199 (blue) as the recent swing high in the event that the stimulus package is not passed prior to November 3.

DOMESTIC FACTORS AFFECTING THE RAND

With no significant news or events this week, the Rand has been at the mercy of global influences and risk sentiment. A steady appreciation of the Rand has continued yet still fluctuates around the 16.5000 key horizontal level. Attention will be focused globally for the remainder of the week with a close eye on the US coronavirus relief package negotiations.

Next week holds several key announcements for the Emerging Market (EM) currency with unemployment, inflation data and Finance Minister Tito Mboweni’s Medium Term Budget Speech (MTBS) being the main attractions. Although these events are likely to cause some change in ZAR crosses, global factors will remain the primary price change driver for the local currency.

DailyFX Economic Calendar:

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USD/ZAR: KEY POINTS TO CONSIDER MOVING FORWARD

The Rand remains favorable to global investors as it endures as an attractive carry relative to more developed economy currencies. Local bond markets mirror this with yields on both the R2023 and R2030 remaining extremely attractive for high-yield seeking investors respectively. Most market participants are positioned for further ZAR strength toward the 15.5000 – 16.0000 zone after which I believe positioning will be reviewed. The undervalued nature of the Rand (according to the Purchasing Power Parity model) encourages possible longer-term strength.

Uncertainty around the US stimulus package is the main factor concerning EM currencies so any certainty around negotiations will likely give the USD/ZAR pair a short-term directional bias. Key points to consider:

  • US stimulus negotiations
  • Falling wedge pattern
  • Expected rise in volatility
  • Next week’s South African data

— Written by Warren Venketas for DailyFX.com

Contact and follow Warren on Twitter: @WVenketas





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GBP/USD Shrugs Off Dire UK Borrowing Data

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GBP price, Brexit news and analysis:

  • UK public sector borrowing in the first half of the current financial year was more than six times the figure a year earlier due to the economic cost of the coronavirus pandemic.
  • Official data also showed that public-sector debt rose further above the £2 trillion level and reached its highest as a percentage of GDP since 1960.
  • UK inflation in September rose to 0.5% from 0.2%.
  • Nonetheless, GBP/USD held its ground as “risk-on” assets benefited from rising hopes that a US fiscal stimulus package can be agreed.
  • The FTSE 100 index, though, is falling back.

GBP/USD edging up despite poor UK economic data

GBP/USD largely ignored a very poor set of UK borrowing, debt and inflation data early Wednesday, suggesting some continuing underlying vigor as “risk-on” assets benefited from rising hopes of a US fiscal stimulus package, and economic strength in China.

There are also hopes that US-China relations could improve if Joe Biden wins the US Presidential election on November 3.

GBP/USD Price Chart, One-Hour Timeframe (October 16-21, 2020)

Latest GBP/USD price chart.

Chart by IG (You can click on it for a larger image)

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FTSE 100 falls back, Brexit talks still a focus

By contrast, the FTSE 100 index of the major London-listed stocks was weaker in early trading Wednesday and there was mixed news on possible trade deals. While the EU-UK negotiations on their relationship once the Brexit transition period ends on December 31 continue to show no signs of progress, the US and the UK have launched a new round of talks focused on goods and tariffs.



of clients are net long.



of clients are net short.

Change in Longs Shorts OI
Daily -6% 9% -2%
Weekly 24% -25% 3%

UK borrowing, debt and inflation all rise

Turning to the UK economy, the cost of the coronavirus pandemic was evident in a very poor set of borrowing, debt and inflation data released Wednesday before the UK markets opened. Government borrowing in the first half of the 2020/21 fiscal year was more than six times the level a year earlier due to the cost of supporting the UK economy during the coronavirus pandemic.

Public sector debt climbed further above £2 trillion to 103.5% of GDP, the highest debt/GDP ratio since 1960.

However, the potentially negative impact of the borrowing and debt data was offset by the news that UK inflation rose to 0.5% year/year in September, up from 0.2% in August.

UK borrowing, inflation data.

Source: DailyFX economic calendar

You can find a guide to reading an economic calendar here

We look at currencies regularly in the DailyFX Trading Global Markets Decoded podcasts that you can find here on Apple or wherever you go for your podcasts

— Written by Martin Essex, Analyst

Feel free to contact me on Twitter @MartinSEssex





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Dollar Falls To One-Month Low on Stimulus Hopes By Investing.com

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© Reuters.

By Peter Nurse

Investing.com – The dollar weakened in early European trade Wednesday to a one-month low, as increased optimism surrounding a new U.S. stimulus package helped boost the demand for riskier currencies, to the detriment of the greenback. 

At 2:55 AM ET (0655 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was down 0.3% at 92.787, falling to its lowest level for a month. was up 0.3% at 1.1859, reaching a one-month high, while was down 0.3% at 105.23. 

News that President Donald Trump was willing to accept a large aid bill, as a string of negative opinion polls puts pressure on him to get a deal done before the Nov. 3 election, has raised hopes for a stimulus breakthrough.

Negotiations between House of Representatives Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin will continue on Wednesday.

That said, the dollar losses haven’t been extreme as there remains strong opposition from within Trump’s own Republican Party about a package of any real size being agreed.

“All in all, a fresh stimulus bill before the elections remains far from certain and we suspect there is not much of it currently being priced in by the markets, which should keep the downside for risk assets relatively limited if prospects of a bipartisan-deal eventually collapse,” said analysts at ING, in a research note.

Aside from the political maneuvering in Washington, traders will look to the release of the Federal Reserve’s October for clues of the extent of the U.S. economic recovery. It will provide a snapshot from businesses and communities about how the resurgence of Covid is being felt across the country.

Elsewhere, traded 0.4% higher at 1.2997, after annual inflation in the U.K. accelerated in September. rose 0.5% on year in September compared with a 0.2% rise in August, driven by higher transport costs, as well as higher prices at restaurants.

Separate figures showed the government borrowed 36.1 billion pounds ($46.75 billion) in September, the third-highest total for any month since records began in 1993, to help finance various coronavirus-relief packages for the economy.

“Whilst it’s clear that the coronavirus pandemic has had a significant impact on our public finances, things would have been far worse had we not acted in the way we did to protect millions of livelihoods,” British finance minister Rishi Sunak said.

Additionally, traded 0.5% lower at 6.6411, falling to its weakest level since July 2018, a consequence of the Chinese economy’s relatively strong rebound from the pandemic.  

“China is the strongest economic story in town, relative to Europe and the U.S.,” said Bank of Singapore currency analyst Moh Siong Sim,in a Reuters report. A Joe Biden presidency, he added, could also provide support by calming Sino-U.S. relations.

On Monday, China reported that its grew 4.9% in July-September from a year earlier.

 





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