By Andrew Stuart Lee Evan
A PREVIOUS analysis done in April for the Aussie proved that the short-term bearish scenario has been accurate thus far. The stronger and more-aggressive-than-expected Fed rate hike of 50 to 75 basis points within a short time frame, coupled with demand shocks from a global lack of demand and the sudden Chinese lockdowns that has dampened domestic demand in spite of Copper supply shocks, have precipitated these outcomes.
Looking forward, however, the Aussie is expected to be on the ascendency with some more short-term pain ahead for bulls.
The China manufacturing Purchasing Managers’ Index (PMI) was stronger than expected with results of 51.7 against the 48.1 estimate by analysts in May, somewhat indicating a resurgent Chinese economy. For the first time in 13 months, the first expansion in 4 months and with the lifting of Covid-19 restrictions, have caused manufacturers to quicken their pace to address unfulfilled demand, resulting in upsides for the Aussie.
Furthermore, a growing global demand outlook for precious metals and commodities and some supply shocks still reverberating in the medium term may continue to drive Aussie demand. To add on, positive signs of slowing US inflation data with a weaker greenback aligned with the drop in US consumer spending, point to further upside, at least from a fundamental standpoint.
In terms of technical, the psychological level of 0.7000 will be a firm watershed point to look out for. Now, we can observe that the Aussie is undergoing a consolidation phase. The double bottom formation at around 0.6829 may provide some supportive indications as indicated by Fibonacci retracements, and the Relative Strength Index (RSI) indicating 37.61 points to a nearing slightly oversold level.
Should the Reserve Bank of Australia (RBA) meeting next Tuesday provide indications of a sharper rate hike (however it is possible that it may be lower than expected), we may see an overshoot from the next resistance of 0.7025 to the June 13 high of 0.7035.
As at the time of writing, it seems that the Aussie bulls have lost momentum and temporarily given up strength to the bears. The Aussie has dropped below the June 23 low of 0.6868 and may test the round bottom of 0.6800. This is precipitated by a drop in the Australia 3-year bond yields of 21 basis points to 2.901 per cent in spite of softer US consumer data. This drop is believed to be temporary with the bulls, expected to catch up.
The writer is strategist at Philip Nova