AUD traded at a ten month high versus the USD Monday supported by rising risk appetite, higher commodity prices and anticipation of a shift in RBA policy bias. Better than expected manufacturing data from Australia and China helped fuel the latest rise in risk appetite and commodity prices. China's manufacturing PMI hit a 14 month high in July and Australia's manufacturing PMI is at it highest level since last September.
The RBA will meet on Tuesday, August 4th and are widely expected to hold rate policy steady at 3%. The key focus of the policy meeting will be whether the RBA confirms a shift in its policy bias. Last week, RBA Governor Stevens in a speech made comments indicating that the RBA plans to shift its policy bias from accommodative to neutral. Stevens said that the upside and downside risks for the Australian economy are balanced, that China's economy was strong and the global economy shows signs of improving. China is a major export destination for Australia. Improving global economic outlook and in China will boost demand for Australian exports. Stevens went on to say that Australia's job sector is performing better than expected and in the Q&A after the speech Stevens indicated that the RBA may consider a rate hike even as unemployment continues to rise. Australia's July unemployment report will be released on Thursday, August 6th and is expected to show a rise to 5.9% from 5.8% last month with net job loss of 15k. The employment report may be less important to RBA policy outlook because of Stevens's comments about rate policy and rising unemployment.
The AUD rallied 2.3% versus the USD last week supported by Stevens comments which suggest the RBA could be the first major central bank to raise interest rates as the global economy recovers. At the July policy meeting, the RBA left the door open for future rate cuts because of low inflation risk. The July policy statement said The Board's current view is that the outlook for inflation allows some scope for further easing of monetary policy, if needed.Â The current rally in commodity prices may encourage the RBA to change its inflation outlook. The trade will look to the statement accompanying the RBA policy decision Tuesday to see whether the RBA eliminates language stating that the outlook for inflation allows scope for further monetary policy ease. This would confirm a shift in RBA policy bias. There is a high probability at tomorrow's policy meeting that the RBA will signal that 3% is the floor for current RBA rate policy. The trade will also be monitoring Friday's release of the RBA Monetary Policy Statement for August. The statement is expected to confirm a shift in RBA policy bias and upgrade the outlook for Australia's inflation and GDP. A shift to neutral policy bias from the RBA is positive for the AUD but the policy shift may have been discounted by the current AUD rally.
The technical outlook for the AUD is positive as AUD rallies above 8400 confirming an upside breakout. A measured move of the breakout suggests a technical target for AUD of 8800.Â The main risk to further AUD gains is the RSI is approaching overbought levels above 72 on the weekly AUD chart. The RSI may set the stage for a short term downside technical correction for the AUD. Expect AUD support at 8235 the July 31st low with resistance and 8598 the August 13th high.