After testing the key resistance at $0.7489 (Fibonacci 38.2% on November debasement) - this is the second time in the past week that AUD/USD failed to break the latter resistance to the upside. The Australian dollar accelerated its fall after the Reserve Bank of Australia decided, as broadly expected, to leave its cash rate target unchanged at the record low of 1.50%. The central bank’s governor, Philip Lowe, made some minor changes to the accompanying statement, reiterating that the economy is “continuing its transition following the mining investment boom” and adding that even though the unemployment rate has improved this year, “labour market indicators continue to be mixed” as part-time unemployment remains significant.
On the inflation front, Governor Lowe maintained his cautious approach as the “subdued growth in labour costs” casts a shadow on the inflation outlook. The latest inflation report, released at the end of October surprised slightly to the upside (1.3%y/y versus 1.1% expected). However, with the market expecting a contraction in GDP growth in the third quarter (-0.1%q/q versus 0.5% in the June quarter), core inflationary pressures should have remained subdued in the September quarter - most of the lift may come from the rise in commodity prices.
In the foreign exchange market, the Aussie is most likely to suffer in the month ahead as traders shift investments towards the US. Indeed, over the last few months, investors across the globe have struggled to find higher returns, which has prompted them to load on risk, lifting high quality commodity currencies such as the Aussie and the Kiwi but also emerging market currencies on a broad basis. Nevertheless, the party may be over for higher yielding currencies as the US yield outlook shows signs of improvement. We therefore believe that the risk is on the downside in AUD/USD against the backdrop of another rate cut from the RBA.