The Australian dollar continues to struggle for the status of the best performer of the G10 and, judging by the economic calendar, pretends to be the most interesting currency of the week. Indeed, the results of the meeting of the Reserve Bank of Australia and the release of data on GDP and retail sales make it possible to expect increased attention from investors, even if the external background does not change drastically.
The main drivers of the more than 10% rally of the AUD/USD were not internal factors. The Fed is seen to postpone an increase in the rate of federal funds in the conditions of slowing inflation and growing political risks. US stock indices have chosen a comfortable area near historical highs, while the steadily low volatility of financial markets fuels interest in income assets. At the same time, there is a recovery in commodity prices, including iron ore, which is extremely important for Australian exports.
Dynamics of rates of the Australian debt market and prices for iron ore
Source: Bloomberg.
At the same time, the situation inside the country remains mixed. After growth for most of the year, the Economic Surprise Index went down in the third quarter, which, under conditions of a weak US dollar, contributed to the consolidation in the AUD/USD pair. It is unusual that the indices of consumer and business confidence went on different roads, which can not accurately reflect the current problems of the Australia's economy.
Dynamics of the indices of economic surprises, consumer and business confidence
Source: Bloomberg.
While firms raised their investment forecast to 17.6%, which is the best figure for the indicator for the last seven years, households suffer from excessive credit debts (representing 190% of income), rising energy prices, and sluggish wage increases. Theoretically, the economy is approaching the state of full employment (in the last six months the indicator has increased by 200, 000) and the growth of business investment can push up labor compensation and inflation, forcing the Reserve Bank to raise rates.
In fact, the tightening of monetary policy by the RBA (interest rate swaps estimate the probability of raising the cash rate from the current 1.5% by June 2018 to 50%) will fall on the shoulders of local companies. Many of them are export oriented, and the 10% strengthening of the "Aussie" was clearly not part of their plans. As a result, the positive balance of trade in the second quarter declined for the first time in 2 years, and the central bank took a rather tough position in relation to the "bulls" for the AUD/USD.
Commonwealth Bank forecasts that by the end of 2018 the pair will rise to the level of 0.85. However, in the short term, the correction risks increased due to the worsening global demand for profitable assets amid the escalation of geopolitical problems, as well as the uncertainty associated with the state debt ceiling and tax reform in USA.
Technically, the AUD/USD pair continues to trade in the range of 0.782 to 0.799. Breakthrough of its upper limit will increase the risks of implementing the target by 113% according to the "Shark" pattern. On the contrary, a successful test of support at 0.782 will inspire the "bears" to develop a corrective movement.
AUD/USD, daily chart
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