Australian election boosts AUD/USD, yet RBA minutes could drive further selling

The Australian elections may have boosted the AUD/USD, yet there is a good chance that the Australian dollar will turn lower once more.

Australia flag Source: Bloomberg

The Australian election caught everyone by surprise over the weekend, with the current ruling coalition snatching a narrow victory against all odds. The opposition came in the form of the Labour party, which has focused much of their campaign on improved approach to climate change and the ramp up of higher rate tax changes. Ultimately markets saw them as anti-business, and thus we saw a positive reaction from the Australian ASX 200 index. Of course, markets loathe uncertainty, and thus the optimism we are currently seeing in relation to the AUD and ASX is as much a reflection of that dislike of the unknown.

However, tomorrow we see the central bank theme return to the fold, with the latest minutes from the Reserve Bank of Australia (RBA) distributed overnight. This brings the reality back home to roost, for many believe we will soon see economic conditions push the RBA into cutting rates for the first time since 2016. We can see how market expectations point towards a rate hikes in the coming meetings, with June perceived as the only meeting with any degree of doubt of whether we will still see rates remain at 1.5%.

Rate cut chart Source: IG chart

Rate cut chart Source: IG chart

One of the biggest drags on Australian economic prosperity has been the US-China trade talks, with the slowing growth in China dragging demand for Australian commodities lower. The AUD/USD chart below highlights the impact of the latest breakdown in talks between the two sides, with traders preferring to sell the Australian dollar over the greenback. Unfortunately, there is little signs of a reversal back on track for negotiations as things stand. The US President Donald Trump stands to benefit from a continued standoff as he seeks to come across as being strong ahead of the 2020 election. Meanwhile, the Chinese government have shown few signs that they would be willing to back down amid such public threats from Trump. No doubt, a deal will ultimately be done, but that is unlikely to come too soon.

AUD/USD 4-hour chart Source: ProRealTime

AUD/USD 4-hour chart Source: ProRealTime

Above we can see that the current rally is bringing the price back towards trendline resistance, following a bullish breakout in the Stochastic oscillator. However, we are seeing that momentum indicator push towards the oversold region (>80) for the first time this month. With the ascent slowing and trendline resistance coming into play, it is likely we could see the sellers come back into play before long. Keep an eye out for the latest monetary policy minutes and an appearance from RBA governor Lowe to guide expectations for the upcoming June meeting. Meanwhile, the economy will be back in focus once again on Wednesday night when the latest manufacturing and services purchasing managers index (PMI) surveys are released.


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