AUD: overheated

AUD: overheated

2020-09-07 • Updated

In February-March, the Reserve Bank of Australia effectively reduced the interest rate from 0.75% to 0.25%. The move was caused by unprecedented damage the Australian economy had to absorb because of the virus – the RBA’s intention was to provide enough stimulus to re-start the economy after such a downturn.

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Consequently, AUD/USD fell from 0.6700 where it has been drifting at the beginning of the year, to 0.5600. Later on, however, the AUD started gaining strength and never failed to do that until now: currently, it trades at 0.7450. The last time it was there is two years ago.

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Now, the trajectory seems quite clear and offers little alternative so far to suspect any change. Or does it really?

A recent survey shows that the RBA is likely to expand the quantitative ease program and/or cut the interest rate even more. The reason is the same: the unprecedented economic downturn expansion that forces the monetary authorities to use all available instruments to improve the situation. In general, the RBA is not very comfortable with the appreciation trajectory the AUD is on. For this reason, take 0.7450 as a likely red zone for bulls as it is very possible that this level will see AUD/USD reverse downwards after the RBA’s session next week.

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