The Australian dollar shows excellent stress resistance: despite the fact that the Reserve Bank reduced the interest rate for the first time in three years, and GDP growth rates fell to a 10-year low, "Aussie" keeps on the border of the 70th figure, trying to gain a foothold above the level of 0.7000. This behavior of the pair is explained not only by the weakness of the US currency, but also by the situation on the commodity market.
The very fact of the RBA rate cut did not come as a surprise to the market: the head of the regulator Philip Lowe warned traders about such intentions at the end of May. Therefore, the Australian dollar "played" this decision long before the meeting. Commenting on the results of the meeting, Lowe reiterated his word, word for word, voiced earlier: "...the regulator made this decision to support employment growth and provide greater confidence that inflation will meet the medium-term target." Given the latest figures on inflation growth in Australia, such a position of the RBA looks logical and predictable.
Yet the intrigue of the June meeting persisted. The question was – does the Central Bank intend to go further along the path of easing monetary policy or it could be considered a "warning shot" without any continuation? The answer to this question was unambiguous: the Australian Central Bank is not only ready to further reduce the rate, but is likely to implement these intentions in the foreseeable future. Low consumer activity, a decline in the housing market, an unexpected increase in unemployment and a slowdown in inflation amid falling GDP growth – all this "bunch" of macroeconomic problems helps to mitigate the parameters of monetary policy. Plus, the US-China trade war, on which Australia depends more than anyone else among the advanced economies.
The data published today on the growth of the Australian economy only complemented the negative fundamental picture. Thus, GDP growth in the first quarter of this year slowed to a 10-year low, that is, to 1.8%. Australia's economy shows a downward trend for almost a year: if in the first quarter of 2018, GDP was at 3.2%, in the second – 3.1%, in the third – 2.7%, in the fourth – 2.3%, and in the first quarter of this year – 1.8%.
The negative trend is visible, as they say, to the naked eye, so the decision of the RBA in this context looks quite reasonable, given that Australia over the past 30 years has avoided a recession. In general, the previously published economic forecasts of the RBA suggest that the interest rate will be reduced to one percent this year. Some experts suggest that the regulator will return to the issue of reducing the rate two more times, but this scenario is not currently basic. But the probability of another round of monetary policy easing at the September meeting is almost 60%.
Despite such gloomy prospects, the AUD/USD pair is quite confident going up, ignoring all the above circumstances. This is primarily due to the weakness of the US currency, which, in turn, reacts to the "dovish" comments of Fed members. And if James Bullard (who has the right to vote this year) once again urged the Open Market Operations Committee to reduce the rate, then Jerome Powell did not rule out the implementation of such a scenario for the first time. And although he noted that at the moment there is no need for this, his comments have excited the market. Following the speech of the head of the Fed, the US dollar hesitated for some time, assessing the "aftertaste" of its rhetoric. At first, greenback tried to regain its position, starting from the positive remarks of Powell about the state of the US economy. But a few hours later, the dollar again came under a wave of sales – after all, the option of lowering the rate for the first time sounded from the mouth of the head of the Federal Reserve, and the market could not ignore this fact.
The weakness of the US currency coincided with the growth of the commodity market, or rather with the growth of the cost of iron ore. This commodity is again trading around $100 per ton after a significant decline in April. The breakthrough of the dam of the Vale company (one of the three world giants for the production of iron ore), which occurred in January this year, did not pass without a trace. Vale was forced to suspend this and other mines in Brazil. According to experts, this could lead to a reduction in its production of iron ore by about 40 million tons in 2019. The national figure also fell significantly: in the first quarter of this year, Brazil reduced exports of iron ore by 12.3% compared to the same period last year, that is, to 66.3 million tons. Let me remind you that iron ore is a strategically important export product for Australia, so the current situation provides background support to the Australian dollar.
From a technical point of view, the AUD/USD pair approached the key resistance level of 0.7010 (the upper line of the Bollinger Bands indicator on the daily chart). If the price overcomes and fixes higher, the next resistance level will be the upper limit of the Kumo cloud – the price of 0.7090.
